Technical Considerations and Planning Issues Having discussed the structural side of taking an income, I would now like to consider some of the planning issues associated with pensions and drawdown. In simple terms, can I draw down from a pension and then reinvest into a pension? Pension Recycling Pension recycling is where a pension commencement lump sum (PCLS), or flexible pension income, is recycled back into a pension as a tax relievable contribution. There is legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, so we have PCLS recycling rules and the Money Purchase Annual Allowance to be mindful of. PCLS recycling There are various conditions that need to be met for PCLS recycling to apply. If one of the conditions can be discounted PCLS recycling rules don’t apply. If a contribution is classed as PCLS recycling the PCLS will be treated as an unauthorised payment and charged accordingly. This would be a minimum of 40% and possibly up to a maximum of 70%, so clearly a thorough understanding of the rules is very important. These lump sum recycling rules consist of six conditions; all conditions must be met for a tax charge to apply. So provided I can discount at least one of these rules then I know that the PCLS recycling charge will not apply. Income recycling Turning now to income recycling, why may this be appropriate for my client? (Mindful if it’s from a flexiaccess drawdown or UFPLS the MPAA rules will apply). It is generally accepted that unvested benefits are ‘better’ than vested benefits due to the availability of tax free cash and potentially small pots planning. In terms of how it works, contributions are made on a ‘gross to gross’ basis so the gross pension contribution is made equal to the gross income amount. This is tax neutral as the marginal rate tax on the income is offset by the marginal rate relief on the pension contribution. Clearly there can be a real benefit here if a non-taxpayer is drawing benefits as the maximum contribution of £3,600 can attract tax relief, but there is no tax to pay on the pension. As with all planning the current and future tax position of the member should be factored, as the key position for recycling should be that this makes the client richer than if they left the money crystallised. Pensions and IHT At the time of writing this (March 2025) we understand the policy intent: pensions should not be used as an intergenerational wealth transfer vehicle. Unused pension funds and death benefits payable from a pension are to be included in the value of estates from 6th April 2027. What we don’t yet have is the detail of how this will be implemented. For clients who viewed their pension as a legacy asset this has become an emotive issue and they may consider drawing on their pension more quickly and perhaps more deeply. In the absence of even draft legislation I would not wish to speculate on specific strategies clients may consider, other than remind you of existing strategies that may be appropriate to contemplate; namely third party pension contributions and, for IHT purposes, normal expenditure out of income exemption. Third party pension contributions As we know pension death benefits for those who die after the age of 75 may suffer income tax in the hands of the beneficiaries (and IHT if death occurs after April 2027), so a strategy that removes some or all of this potential tax with appropriate pre death planning may be very useful. For some clients the conversation around pre death wealth transfer may be very relevant as part of their overall strategy and also very tax efficient, and this is where third party contributions may have a role to play. As we know, for third party contributions, tax relief is given to the recipient of the contribution not the donor. There is the de-minimus contribution of £3600 for tax relief, but this can be much higher if the recipient has sufficient net relevant earnings, so in effect up to the standard annual allowance, and the tax efficiency can be very high for the family as a whole. Of course if the recipient was a very high earner then you would also need to consider the impact of the tapered annual allowance rules. The six conditions are: 1. the individual receives a pension commencement lump sum 2. because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be 3. the additional contributions are made by the individual or by someone else, such as an employer 4. the recycling was pre-planned 5. the amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds: • £7,500 for events on or after 6 April 2015, or • 1% of the standard lifetime allowance for events before 6 April 2015 6. the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. 8 Income Drawdown
RkJQdWJsaXNoZXIy MjI4MjU4NQ==