Tax-Free Cash Recycling - DON’T FALL Into This TRAP

[@MeaningfulMoney]

To make things a bit more fun, we've added a counter on the screen that keeps track of the number of times I say "tax-free cash" throughout the video. Leave a comment below before you start watching and guess what the final count will be.

[@glynjones1112]

15

[@elliotpack2312]

12

[@MrDuncl]

Almost as many mentions of "tax-free cash" as discussing pensions with a now retired younger colleague. However, I think his aim was to simply spend it. The Government was saying they wants the over 55 to stay working yet waves what can be three years salary for stopping in front of their noses.

[@A-Name-101]

Pete, please don’t have background music whilst you are talking it is difficult to follow you, this especially difficult when you are hard of hearing as it’s really distracting! Thanks 🙏

[@jimboc9294]

Couldn’t agree more. And I’m not HOH. It distracting when trying to take in a complex financial concept … add in the flashing tax free cash count and it’s needlessly hard to follow what you’re saying Pete.

[@travellingtom6091]

Agree

[@andrewmitchell2313]

Yeah, no need mate…

[@bootburner4544]

While Pete is considering your request could we ask you to learn how to speak/write proper English. "You are" is contracted to "You're" whereas "Your" is a completely different word with a different meaning. It makes it difficult for Pete/us to follow what *you're* saying when you use incorrect grammar and/or spelling. 😁

[@A-Name-101]

@@bootburner4544 edited, happy now? 😂

[@robgriffiths8755]

I agree too. Difficult to concentrate with music

[@EtonieE25]

Pete. Thanks for the heads up against the HMRC robbers and falling into one of their pits 👍

[@paulbrightwell3621]

My reading of the HMRC tax manual on the criteria of what constitutes a significant increase in contributions goes beyond simply whether these contributions are beyond 30% - but whether the increase was unexpected given that person's circumstances. It gives some examples of what would not fall under the recycling trap - but each person's situation will be different - so I am assuming this would be looked at on a case by case basis. For example - if someone was to start drawing a DB pension while still in employment and that DB pension included an automatic lump sum alongside an annual pension - which combined with their annual salary moved them into the 40% tax bracket (resulting in all their pension income being taxed at the 40% rate) any sensible person in my opinion (especially if they didn't need the extra money to maintain the same standard of living) would increase their pension contributions - probably quite considerably. A DB pension is taxable and does not trigger MPASS or have any restrictions on how it is used. That the DB pension included a tax free lump sum should not in my opinion trigger this condition - especially if it can be shown that a) the taxable pension income was sufficient to increase pension contributions without changing net monthly income, and b) that the person can show how they used their tax free lump sum to make home improvements. Having evidence of how you did use your tax free lump sum in such a circumstance would I assume also counter the condition of pre-planning. If you can show that you planned (and did) use your lump sum to make home improvements and given it is for the HMRC to prove pre-planning - that would stop that in its tracks. If, however - the pension increases went significantly above what could be delivered from the increase in income from the regular pension then I guess the HMRC would then question whether the pension lump sum was also used to achieve this. The point I am making is if you find yourself in that kind of situation its best to be in a position where you might inadvertently fall into this trap - where you genuinely have not used your lump sum to recycle but where you would be mad not to increase your pension because of effectively a DB pension income windfall on top of your work salary - then make sure you keep the evidence in case HMRC come looking.

[@shimsteriom4191]

Half way through the video and I've paused it to type this.... Just an observation but the background music is a bit distracting from the message you're trying to get across.

[@johnavery15]

I researched this a while back and found an article where their research could find no examples where anyone was penalised by HMRC for tax free recycling. After all the pension scheme doesn't inform HMRC of any payments and a pension scheme doesn't check where the source of contributions or tell HMRC about it. I'm not condoning recycling, just reporting what I found.

[@PatrickWarner007]

Yes I had read this too - none of the people who work in the pension business on the forum I was on could come up with a single example of someone who was sancationed, or even investigated.

[@bashh568]

Pete you make great videos that are really useful for me, thank you. You like to shake up the audio & video elements on your production but honestly the background music is just annoying (sorry!)

[@llamudos9809]

So if i take 25% of my tax free cash from my DB account at retirement and put it into a SIPP. HMRC has to prove recycling? If they are anything like the police i fancy my chances.

[@67eamonn]

I was only researching this issue yesterday! Your video is much clearer than the official guidance. It's put my mind at rest should I be lucky enough to be in this situation in a few years time. If you can afford it toys be crazy not to recycle at least some of a DB lump sum.

[@AlexBurns86]

Brilliant and informative as always. I always considered myself pretty clued up financially speaking, but this one was new to me 😐. Keep up the great work.

[@slayerrocks2]

Brilliant as ever Pete. One thing that surprised me was, I was under the impression that DB PCLS was not subject to recycling rules. I guess I was incorrect, then?

[@johnporcella2375]

I thought that too! Thing is, you need nett relevant earnings to pit more than a minimum in a SIPP, say. So, if in employment, surely you can always say that the money came from wages or salary?

[@hooksforestchin]

As partners are independent for tax purposes, could one person take their tax-free cash and then give it to their partner to put into their pension? Works probably only be a benefit if a higher rate tax payer when putting the money in, but in theory is that allowed?

[@claritylifestylefinancialp9869]

Fantastic video Pete!

[@barrycook6552]

So if I could use salary sacrifice for £47k per year into DC pension while 55 & 56 (using savings to balance the lost income), I could crystallise £180k per year from that DC pension while 57, 58 & 59 to get £45k per year tax free (to replace income) and increase my salary sacrifice to £60k per year? Contribution increases by £13k yearly after getting tax free cash compared to the two years before, so only a 28% jump from £47k, and I would be using equivalent of 29% of the tax free £45k for that £13k increase; so hopefully staying within the rules in two different ways. Would stop the payment of 40% income tax entirely over those 5 years, to be £100k better off!

[@petesmith2879]

Answer to this would be great

[@TriumphTiger800]

Hi Pete, thanks for the great videos! In case no 3 you mention reducing the 1/3 of the PCLS to 29% to avoid the rules, but that would be the nett amount rather than gross (after the Govn's 20% tax relief). I thought contributions were always treated as gross for these rules? Thanks

[@trade2fire257]

Great video, thank you Pete. If I've considered this correctly then, it doesn't matter if the individual also had increased income /available cash during the same period? For example, say the individual also had an inheritance and paid that into their pension and it just happened to coincide with them taking tax free cash from their DB pension? Thank you!

[@NomadJRG]

Interesting video! What do you think about this scenario: A husband and wife, if one were to take out £60k as tax-free cash to give to the other to put in their pension to top it up as it is smaller than their partners. Would this be considered recycling?

[@ianwall9152]

My thoughts exactly !

[@andreacarss4718]

Cant concentrate on the information you give due to annoying music on video

[@CathyPowellGlass]

I wonder this too

[@shimsteriom4191]

Great video Pete, thanks. 👍 Worth thinking about the background music though. 😉

[@PatrickWarner007]

The is a slight grey area still in the increase to pension contributions part - what if you took your tax free cash, then started working part time, but still kept your contributions the same (which arguably you wouldn’t have been able to do if you didn’t have the tax free cash). By the HMRC rules and this video it seems like that would be ok as it’s the discrete £ value that is tested and not the % of your earned income.

[@johnjones6890]

Always love your work

[@stephenlaverty6266]

This is fantastic stuff, this is really relevant to me. I'm 55 have fairly large SIPP funds and want to keep paying into them while taking TF cash to do a buy to let. TBH I have over the last 5 years paid in over £30 K pa into these SIPPS which is 100% of my earnings each year. I have done this by subsidizing my income with savings that I have. Is the safest thing for me to do to be absolutely sure of no come backs on this in the next few years, to make sure I pay in even slightly less this tax year, and slightly less in the next tax year to be absolutely sure. Just as an aside, clearly with these rules, TF cash recycling can be done legally, if a person could recycle tax free money into a pension as it was not deemed to be much above what they had paid in before, is this a correct assumption. Many thanks in advance

[@supermankelly]

I didn't understand any of that, except I can pay 29% of pension withdrawal back into the pension for free cash. 👍

[@deanroy9420]

I Will go and study Financial at University and in 3 years, I will come and try to study your video. And yes, I have subscribed 😅

[@Isabel-of4wq]

Asking for a friend …. Newly retired and started drawing small basic state pension. Received tax free cash from small private pension, then later received statement on large gaps in NI contributions - she now wants to make up the NI contributions to boost the state pension. Would that break the rules and be considered pension investment for this purpose?

[@MeaningfulMoney]

No, definitely not. Paying NI contributions to improve state pension benefits would not be considered recycling as there is no tax relief being gained.

[@chrisdaviesguitar]

How about a post on whether it's worth investing, now the Tories have reduced the amount of tax free dividends we are allowed to £1000 for this year and down further to £500 next year. Is it worth the risk for so little gain.

[@MrRawMonkey]

Music is very distracting. I had to give up on the video in the end.

[@Nickelodeon81]

Hi can you make the background music LOUDER? Thanks.

[@MeaningfulMoney]

Yeah, we learned from this one.

[@alexm7310]

Oh blimey! The music... eek

[@giraffeman8158]

Hi Pete. This had me worried for a bit as I am in scenario 1. Luckily I have not increased my pension contributions by enough to breach the 30% level which made me think I am missing out. Could you clarify if smart pension increase counts toward this as effectively my employer is making the increased contributions not me?

[@haroldbetterson1877]

Music gave me a headache

[@martinwalker9234]

I retired at 56 with a DB pension I could live on comfortably and also had a DC pension worth around £380k. I stopped work completely and noticed there is a HMRC rule that allows a person with zero income to pay £2880 into a DC pension and claim £720 tax relief. I looked into this as it seemed too good to be true with HMRC 'donating' 25% per year into my pension. I checked with my pension provider and they said it is within the rules. I cracked on paying in £2880 every year and sure enough HMRC handed me an additional £720 every year....even though I lived overseas I claimed this tax free cash for 5 years after leaving the UK.... but if I lived in the UK I could continue to do this until I was 75. Why doesn't every one do it? It appears to be free money.....what's the catch? PS: I used the tax free lump sum from my DB pension to pay the £2880 into my DC pension, but this contribution per year was well below my normal contribution when I was working so according to the rules did not count as recycling and I can still take out 25% of my DC pension tax free when I start drawing down.

[@gerrydixon9984]

Pete, so if I understand correctly, it's about taking Tax Free Cash out of your Pension, and then maybe putting some of it back into a Pension again to gain additional Tax Relief. I am about to be made redundant and want to pay in a large amount of my settlement into my Stakeholder pension to take advantage of Carry Forward Allowances. Given I have a reasonable Pension Pot, I decided That I would Take Early Retirement in the New Tax Year (2025) and stop contributing to a pension Sept 2024. I had an IFA indicate that I had to be careful of Cash Recycling, but I given what I have just described, I don't think it applies, as I have no intention of putting any tax free cash I take out in the New Tax Year (when I start Flexi Drawdown) back into my Pension. Would you agree, or am I missing something ?

[@PaulrB1968]

I have old pensions consolidated and planned on taking a tax free cash lump sum to spend on our house but am still employed and paying into a separate work place pension, I assume this is ok?

[@Tim_gaylor]

Very useful Thanks🙂

[@malvanlondon8683]

Thanks for the video. What is the software. Voyant, perhaps?

[@stevenhutchinson3850]

Please drop the appalling background music. Not only did it sound horrible it also made it difficult to follow what you were saying.

[@DavrosStandard]

Hi Pete. Is the 30 percent limit on reinvestment of tax-free cash a total limit (over all years) or is it a limit of 30 percent per year? Thanks 😊

[@robkewley]

Rule 3. What happens if you are self employed and have lumpy contributions. Let’s say years one and two are modest, three is high, but work dries up in years 4 and 5 and there are next to no contributions. How do you demonstrate it’s not pre planned. It’s not like you have been made redundant

[@PatrickWarner007]

It’s probably also worth mentioning that even in the worst case scenario where you have a pot of about 750K, if my maths is right you would only be able to do about 3 rounds of optimised recycling before you hit the 250K tax free cash limit anyway, and in this optimum scenario you could save about an additional £24K if you were a higher rate taxpayer in retirement (which is rare) - in reality the scale of the issue probably isn’t worth HMRC tracking it all so they would only look into it if you were being investigated for some other reason I suspect. Not sure if I’ve got that right but that was my impression

[@johnporcella2375]

What if the pension fund was way lower than £750,000?

[@jonathanwarne3480]

Presumably putting it in your partner's pension would avoid this issue?

[@stevenhutchinson3850]

Pete, can you please re-release this video without the music. Having a hearing problem like many of your older viewers I couldn't make out that I am sure was interesting content.

[@malvanlondon8683]

I presume putting the money into an ISA does not involve a risk of recycling. ?

[@andrewkingdon2000]

Hi Pete, I appreciate your advice as usual. One quick question, do you think that a call to HMRC beforehand to "clarify" things would help? I mean surely it would take the wind out if their sails (especially point 5) if they actually discussed it with you in advance?

[@johnporcella2375]

Surely if you discuss it with HMRC then you are pre-planning?!!

[@kevinpreston5794]

Wow! I’m going to need to watch this a number of times to get my head around it. Is it odd that I actually enjoy this stuff? 😂

[@MeaningfulMoney]

Well, you’re not alone Kevin, so take comfort in that!!

[@stephenkelly3431]

Great video Pete. Can you provide some simple direction. Took £37k from dc scheme in March for 2 cash isas (wife and i at excellent rates). Still working and want to pay from salary maximum amount into dc scheme. Have jus left empkoyers db scheme (31/3/23) to maximise impact of cpi revaluation in april 24. Employer also contributes up to17.75% of my taxable payinto new dc scheme. Also will take £180k tfls from db scheme when i retire 31/12/23. Question - is my additional contribution levels compared to my tfls of £180000(i.e £60000 =30%) or 30% of £37000pcls?. Also when looking at previous 2 years before taking pcls/tfls do HMRC take into account my and my employers contribution to both my db and dc schemes. Thanks

[@mwscuba]

Ok so what if you took money from an ISA to pay into your pension at the same time as your tax free cash would that count

[@MeaningfulMoney]

That would be fine

[@londonman8688]

is the 30% rule over one year of 3 years ?

[@timwaldram5619]

Im slightly confused by this so must be missing something. I thought that once you had started withdrawing money from a pension the amount you are allowed to invest in a pension each year drops from the new £60,000 limit to £4,000 so recycling would be impossible anyway? Presumably I’ve misunderstood something?

[@Robby1968]

The Money Purchase Annual Allowance isn't triggered until you take more than the PCLS tax free cash. The new allowance is now £10k not £4K

[@johnavery15]

Also, MPAA relates to DC schemes. You can take benefits from a DB scheme (PCLS + annual pension) and MPAA is not triggered.

[@johnporcella2375]

​@@Robby1968PCLS? What does it stand for?

[@johnporcella2375]

Tim, I was equally confused! Eventually remembered that the video mentioned that defined benefit schemes did not count for triggering a lower limit of £10,000 contributions in future.

[@markthomasson5077]

Don’t forget that when you finally come to spend the cash it will be subject to income tax. So it’s not the big bag of sweeties you may think. Still worth about £180 per year.

[@martinthorpe3274]

Does your life and work need a theme tune! Think how annoying it would be if we were all walked along to music! So why does this need to have muzac!

[@MeaningfulMoney]

Noted. You’re not the only one to mention it. Not by a long shot!

[@stephengreen2626]

I found this quite hard to follow. I get that there are 4 or 5 tests but does this mean I have to pass all of the tests or just one of them? I am not working and have taken all my pensions but as I have decided to sell my buy to let’s, this leaves me living just on pensions. I put in £2800 and received tax relief and was hoping to take out some tax free cash in a couple of years. I only knew about the annual restriction when not working. I cashed in or claimed my last pension four years. Have I created a problem whilst trying to create some future income?

[@MeaningfulMoney]

I’m pretty clear at the start. ALL the tests have to be met for recycling to have happened. And no, from what you’re saying, you should be fine

[@stephengreen2626]

Ok, thanks.

[@kimlaw6782]

Great info but will unsubscribe if music continues

[@yaaseenbaksh7535]

Hi does the same thing apply to the LISA. So, when I retire can I take money out of my stocks and shares LISA and put it into my pension?

[@MeaningfulMoney]

Nope - TFC recycling rules so not apply to LISA money.

[@yaaseenbaksh7535]

@@MeaningfulMoney Thankyou :)

[@67eamonn]

Pete, I know that DB pensions don't trigger the MPAA. But if you have a DB pension that also has an AVC pot (that is managed by a pensions firm such as Aviva etc.) - would that element be seen as a DC pension and, thus, trigger MPAA? Thanks.

[@MeaningfulMoney]

Usually, yes, unless it is linked to the scheme such that the full AVC can be taken as tax-free cash.

[@67eamonn]

@@MeaningfulMoney Thanks, Pete. My wife has a local government DB with AVC scheme so I'll look into the details of the lump sum payout.

[@MrDuncl]

@@MeaningfulMoney In the scheme I am in you can only take the greater of 25% or £50000 tax free from the AVC. I have no idea where £50000 came from as I can't trace it to any Government regulations.

[@Jeffybonbon]

quick question can i take a small amount of tax free cash from my 100k pension pot of 400per month over 5 years and if i am still working can my employer still pay into my SIPP

[@vinnyc126]

Yes, my understanding is that you can, but if you start drawing the pension then you don't get tax relief on your future contributions.

[@Jeffybonbon]

i have checked this out and my understanding is as long as your employer is makeing contrbution its ok and if you only take the tax free part of the fund contrabtions can be up too 6ok a year if you take taxable income it falls to 10k a year @@vinnyc126

[@Swingking1977]

You lost me at the third Tax Free Cash

[@MrHockster]

Hi Pete i will be getting a redundancy payment next year, can i put this into my linked avc to avoid paying tax, then move it through my db scheme(rules allow) and out as a tax free lump sum or is this recycling, i'll be 60

[@johnporcella2375]

You should not be paying tax on your redundancy if it is not contractual, surely?

[@MrHockster]

​@@johnporcella2375 The first £30,000 is tax free the rest is taxed at your tax rate, as I'm taking early retirement I need as much untaxed funds as I can get

[@robertperry9593]

Definitely lose the music

[@markfindlay8636]

Oh no I'm in trouble, where's my canoe?

[@Gemok1980]

Does money from a LISA at 60 count as "Tax Free Cash"

[@andrewclark898]

No

[@gavjlewis]

I'm sceptical about things. If you have read the HMRC page and are asking a financial advisor about it you are obviously aware and thus it is pre-planned. If you read the page after you had recycled your cash and asked a financial planner then you could say you had done it unknowingly/by mistake. But as I have watched your video and commented on it I couldn't possibly say I had done it unknowingly or by mistake. I watch your great videos on tips to save money. This one could potentially cost you money! 😂

[@icebear_racing]

Im assuming you cant make multiple payments in a tax year? If so you could just recycle 7499 per year? Or multiples of 7499 in a single tax year.

[@gja1605]

This video is completely unwatchable because of the lounge music in the background. If all future videos are going to be like this I’ll be unsubscribing.

[@johnlindsay3820]

Please take the music off - totally unnecessary - and off putting

[@kw8757]

Pete, lose the cheesy crap music.