new pension rules - lump sum recycling

In the Pre-Budget report, the Inland Revenue indicated that they intended to stop the potential abuse of the pension tax simplification rules whereby a scheme member withdraws a tax-free lump sum which is reinvested back into the pension scheme, generating further tax relief, in turn allowing a further tax-free lump sum to be paid out so that the cycle could be repeated.

The Chartered Institute of Taxation were concerned that any new legislation would catch innocent persons who were not actually carrying out tax avoidance and that further consultation was required.

The new legislation has now been published and states that the rules will only apply where:

• The individual receives a pension commencement lump sum which, when taken with any other such lump sums in the previous 12 months, exceeds 1% of the standard lifetime allowance (for the 2006/2007 year, this is £15,000 – 1% of £1,500,000).
• 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 (If the cumulative amount of the additional contributions exceeds 30% of the lump sum).
• The additional contributions are made by the individual, or by someone on their behalf.
• The recycling was pre-planned.

The revised draft legislation and guidance can be found on the HMRC website at http:// www.hmrc.gov.uk/budget/recycling.pdf

Please feel free to contact our sister company, Stiles and Co Financial Services Ltd for advice concerning pension schemes.