What is the pension recycling rule and who does it affect?

Full answer

**Pension recycling** is the practice of withdrawing a pension commencement lump sum (PCLS — the tax-free lump sum) and then contributing that money back into a pension to gain further tax relief. HMRC treats this as an **unauthorised payment** — triggering a severe 55% tax charge. **The three-part recycling test (all must be met for recycling to apply):** 1. The **PCLS (or a series of PCLSs over 12 months) exceeds £7,500** 2. **Pension contributions increase** significantly as a result of receiving the lump sum 3. The increase in contributions **would not have occurred** but for the lump sum **Consequences of recycling:** - The PCLS is treated as an **unauthorised payment** - An unauthorised payments charge of **40%** applies to the individual - An unauthorised payments surcharge of **15%** applies if the amount exceeds 25% of the fund - Total effective charge can reach **55%** **12-month look-back window:** HMRC can look back 12 months before the PCLS was taken and 12 months after to assess whether contributions increased as a result. **What is NOT recycling:** - Taking a PCLS and spending it (not reinvesting in a pension) - Taking a PCLS and contributing within normal/ongoing contribution patterns - Contributing to a pension up to the Annual Allowance without triggering all three tests simultaneously **Legitimate strategies:** You can draw pension income via **flexi-access drawdown** (not the PCLS) and make new contributions — subject to the Annual Allowance or Money Purchase Annual Allowance (£10,000 if you've flexibly accessed drawdown). **Self-certification:** Pension scheme administrators require members to confirm they are not recycling when taking a PCLS.

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