RPSM04104920 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Establishing when the recycling rule applies

When does the recycling rule apply?

The recycling rule will apply in respect of all pension commencement lump sums that are paid on or after 6 April 2006, where those lump sums are used as part of a recycling device, regardless of when the significantly increased contributions are actually paid. Such significantly increased contributions can include contributions paid the 2005/06 and 2004/05 tax years. The recycling rule applies when:

• the individual receives a pension commencement lump sum,
• because of the lump sum, the amount of contributions paid into a registered pension scheme in respect of the individual is significantly greater than it otherwise would be, further guidance about what is a significant increase in contributions is on RPSM04104940.
• the additional contributions are made by the individual or by someone else, such as an employer,
• the recycling was pre-planned, further guidance about determining whether the recycling was pre-planned is on RPSM04104930.
• the amount of the pension commencement lump sum, taken together with any other such lump sums taken in the previous 12 month period, exceeds 1% of the standard lifetime allowance, and
• the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is on RPSM04104950.

It should be noted that very few lump sum payments will be affected by this recycling rule. Pension commencement lump sum payments will not be caught if they are paid as part of an individual’s normal retirement planning. More detailed guidance about when the recycling rule will, or will not, apply can be found on RPSM04104925.