Pension Lump Sum Recycling
Pension lump sum recycling is used in the United Kingdom by a member of a pension plan who changes employers. The method, which provides a significant tax advantage, has fallen under more scrutiny by UK Revenue and Customs.
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Tax-Free Lump Sum Pension
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Under UK pension rules, a pension plan member can choose to receive a tax-free lump sum payment from his pension plan when leaving an employer. Basically, he exchanges a portion or all of his annual pension entitlement for a lump sum that he receives tax-free.
Pension Lump Sum Recycling
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What the UK government calls recycling entails taking the tax-free pension lump sum and reinvesting it in a new pension scheme to benefit from more tax relief. The government introduced the recycling rules to prevent this practice when the only goal is to exploit pension tax-relief rules.
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Conditions for Recycling
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For recycling to exist, all five of these conditions must be met: A tax-free pension lump was paid within the previous 12 months; the amount exceeded 1 percent of the standard lifetime allowance (18,000 pounds in 2010/11); there was an increase of more than 30 percent of the expected contribution to a new pension scheme; there was a pension contribution of more than 30 percent of the tax-free lump sum; and the recycling was planned.
Possible Penalties
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Penalties can be quite harsh. They can include a 40 percent tax on the lump sum amount, an unauthorized-payment surcharge of 15 percent of the lump sum, a scheme sanction charge of 40 percent of the lump sum, or a 40 percent de-registration charge of the entire pension plan assets.
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References
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