RPSM04104925 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Establishing when recycling applies

Further guidance on when recycling applies

RPSM04104920 sets out the conditions for the recycling rule to apply. This page provides guidance on how these conditions will be interpreted in practice.

Scope of the recycling rule

The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum.

The recycling rule will apply where an individual envisages recycling a pension commencement lump sum by any means; from simply reinvesting the lump sum back into a registered pension scheme by way of a relievable pension contribution paid by the individual, through to the use of any devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable, that enable the effective recycling of a pension commencement lump sum.

If a pension commencement lump sum is taken as part of a structured and pre-planned arrangement for paying significantly greater contributions to a registered pension scheme, the fact that the individual has other funds from which the significantly greater contributions are paid or could have been paid does not mean that the recycling rule is avoided.

Examples that illustrate situations where the recycling rule applies are given at RPSM04104980 

Circumstances where the recycling rule does not apply

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect of the increased contributions in that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances unless the individual intended to use that pension commencement lump sum as the means of making those increased contributions, whether in a direct or indirect way.

The mere fact that the pension commencement lump sum is paid into the same bank account as that from which savings were taken to make the increased contributions does not of itself mean that the contributions have been paid “because of” the lump sum. The individual must still be shown to have intended to use the lump sum as the indirect means of making the increased contributions.

The recycling rule is not intended to apply to individuals who simply increase contributions to registered pension schemes (or who have increased contributions paid in respect of them, such as by way of salary or redundancy sacrifice) with the intention of increasing the benefits that will ultimately be paid from those schemes, particularly a pension commencement lump sum. This is provided no pension commencement lump sum is actually used as the means to increase those contributions, whether in a direct or indirect way. This is because the recycling rule applies only where contributions are significantly increased “because of” the lump sum.

Also the recycling rule does not apply where an individual takes a pension commencement lump sum and, when taking that lump sum, had no intention of using the lump sum as a means, whether directly or indirectly, to pay contributions into a registered pension scheme. This is because the recycling rule applies only where the recycling was planned before the first relevant transaction.

Examples that illustrate situations where the recycling rule does not apply are given at RPSM04104990.