RPSM04104940 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Significant increase in contributions

What is a significant increase in contributions?

One of the conditions for the recycling rule to apply is that there is a “significant increase” in the amount of contributions paid:

• by the member to any one or more registered pension schemes
• on behalf of the member to any one or more such scheme (for example, where the spouse of a member makes contributions on behalf of that member), or
• by an employer or employers in respect of the member to any such scheme.

(Including any combination of the above.)

HMRC will generally take the view that such a significant increase occurs where, because of a pension commencement lump sum, the amount of the additional contributions are more than 30% of the contributions that might have been expected.

The amount of additional contributions is measured on a cumulative basis to determine whether or not a significant increase has occurred. See RPSM04104950 for more information about the cumulative basis.

The underlying principle of whether or not there is a significant increase in the amount of contributions is, first, to establish the amount of contributions that might have been expected to be paid in the absence of a pension commencement lump sum and then compare that amount with the contributions that have been paid as a result of receiving the lump sum.

The fact that there has been a significant increase in contributions in conjunction with the taking of a pension commencement lump sum that, itself or together with other such lump sums taken in the previous 12 months, exceeds 1% of the standard lifetime allowance, does not necessarily mean the recycling rule will be triggered. Even though such an increase might be a significant increase, this would not trigger the recycling rule where the significant increase is not as a result of taking the pension commencement lump sum.

For example, an individual’s contribution pattern might vary from year to year but the basis on which those contributions are paid does not change. Another example would be where an increase is, in effect, beyond the control of an individual, such as where contractual contributions in respect of the membership of a particular scheme are increased across the board for all active members of that scheme. These increases may be significantly greater than the previous year’s contributions, but the increases are not “because of” a pension commencement lump sum, and so the recycling rule is not triggered.