For UK financial advice professionals only, not approved for use by retail customers. Click here for the customer website.

Pension recycling

Last Updated: 6 Apr 24 14 min read

Recycling a pension commencement lump sum or pension income back into a pension can potentially have benefits to the member, in this article we will look at the rules and these potential benefits.

Key Points

  • Electing to draw a pension to recycle that income back into a pension may be a trigger event for the Money Purchase Annual Allowance (MPAA).
  • The MPAA was reduced from £10,000 to £4,000 with effect from 6 April 2017 and then increased back to £10,000 from 6 April 2023. Once triggered the MPAA applies to all money purchase contributions thereafter (not just in that tax year).
  • Carry forward is not available for money purchase pension contributions once there has been a trigger event.
  • 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 classed as an unauthorised payment and charged accordingly.
  • A significant increase in contributions is measured over a cumulative period which includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years after.

Case studies

Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension). Similarly, from 6 April 2019 Welsh Taxpayers pay the Welsh Rate of Income Tax (CRIT (C for Cymru)) on NSND income. 

Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. For more info on SRIT and how this works in practice, please visit our facts page. For more info on CRIT and how this works in practice, please visit our facts page

What is 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. Legislation is in place to ensure the system that provides tax relief on pension contributions is not abused, with Pension Commencement Lump Sums subject to PCLS recycling rules and those who flexibly access their pension being limited by the Money Purchase Annual Allowance for future defined contribution pension contributions.

In this article we will focus on PCLS recycling and Flexi-access income recycling. Please note that recycling non-flexibly accessed pension income, such as unrequired income from a defined benefit scheme, would not (in itself) result in the triggering of the MPAA.

PCLS Recycling rules

Recycling rules were originally designed to prevent pension holders from abusing the tax incentives provided by pensions, by using a PCLS to make further pension contributions (hence gaining further tax relief on monies that had already benefited from tax relief). The rules introduced to prevent this lump sum recycling may have a limiting effect on income recycling. The lump sum recycling rules consist of six conditions; if all conditions are met the amount of the pension commencement lump sum is treated as an unauthorised member payment and charged accordingly. The six conditions are:

  • the individual receives a pension commencement lump sum

  • because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be

  • the additional contributions are made by the individual or by someone else, such as an employer

  • the recycling was pre-planned

  • 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 

  • and the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.  


As long as one of the conditions can be discounted, the PCLS recycling rules do not apply and, the PCLS payment would not be regarded as an unauthorised payment. There are several terms included in these conditions which need further explanation.

Let’s consider a potential scenario to demonstrate how the rules might work in practise.

Gunther is beyond state pension age, although he continues to work, and his income from employment makes him a higher rate taxpayer. He took benefits from his employer’s non-contributory defined benefit pension scheme 11 months ago. His pension commencement lump sum (PCLS) was £62,000 and he receives a monthly scheme pension of £2,000. He is now choosing to take benefits from his paid-up personal pension plan. He will take his maximum PCLS of £30,000 and designate the remaining £90,000 to flexi-access drawdown. He intends to use the PCLS to pay for home improvements.

He plans to live off his salary while recycling his scheme pension income back in to personal pension so he can benefit from higher rate tax relief.

By working through the six points methodically any condition which will have a definite result can be ruled out so these can be dealt with first:

1. The individual receives a PCLS

This should be straightforward enough. PCLS is a specific type of authorised member payment. One of the conditions for a lump sum payment to be considered a PCLS is that it must be connected to an arising entitlement to a ‘relevant pension’ benefit under the same registered pension scheme. There is one exception to this rule, which is where the member qualifies for scheme specific lump sum protection (they were entitled to tax-free cash of more than 25% of their pension fund as at 5 April 2006).  Where those conditions are met, a trivial lump sum may be paid instead of a connected ‘relevant pension’.

Why is this important?

A PCLS cannot be paid where all the benefits are being paid in lump sum form. This is because legislation requires a PCLS to be paid in connection with an entitlement to a pension.

Effectively, the tax-free portion paid from any of the following is not PCLS:

  • a ‘small pot’ payment,

  • an uncrystallised funds pension lump sum (UFPLS),

  • a trivial commutation lump sum,

  • a winding-up lump sum,

  • a stand-alone lump sum

Gunther has received a PCLS so this condition is met.

2. The amount of the PCLS, added to any other PCLS taken in the previous 12 month period, exceeds £7,500 (for events on or after 6 April 2015)

This relates to any payment of PCLS made within the 12 month period. So as covered in 1. this excludes any lump sum that is not a PCLS.

Gunther’s PCLS (£30,000) plus other PCLS also received within the previous 12 months (£62,000) exceeds £7,500 so this condition is met.

3. The cumulative amount of the additional contributions exceeds 30% of the PCLS

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above.

Gunther has met this condition too. It could be believed that the amount of the additional contributions is compared (assuming the cumulative amount is £24,000) with 30% of the combined PCLS payment (30%x {62,000+30,000}) £27,600. As £24,000 is less than £27,600 it would appear that this rule does not apply. This is incorrect. As the additional contributions exceed 30% of £30,000 (ie £9,000) then this rule applies. 

4. The additional contributions are paid by the individual, their employer or any other party

This is a catch all. If the pension contribution is paid for an individual who has received, or will receive, a PCLS, then no matter the source of the contribution it is taken in to account when considering the PCLS recycling rule. The only exception to this is where the individual is age 75 or older when the contribution is paid, which would mean only employer contributions would be considered under the recycling rules.

An individual may use their PCLS to pay a pension contribution on behalf of another, eg spouse, civil partner, child etc and this cannot be considered PCLS recycling. It needs to be the same individual, who receives the PCLS and benefits from the new pension contribution, for PCLS recycling to be a possibility. 

Gunther received the PCLS of £30,000 and he has paid a pension contribution to his own plan so this condition is met.

In Gunther’s case none of the preceding points have been ruled out, so the next stage is to consider if the recycling was pre-planned. It may not be possible to reach a definite conclusion and HMRC may challenge if they decide that recycling applied.

5. Because of the PCLS, the amount of contributions paid to a pension for the same individual is significantly greater than expected

What constitutes a ‘significant’ increase? 

The test is for increased contributions over the cumulative period exceeding 30% of the amount of contribution otherwise expected. The cumulative period works in the same way described under rule 3, so it includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

However, the important part of this test is that the increase must be deemed to be ‘because of the PCLS’. So even where a contribution exceeds this 30% rule, this won’t be deemed recycling where the individual does not have control over the increase. For example, if an employer pays increased pension contributions across the board for all active scheme members. 

How do we apply this test to Gunther? Prior to receiving either of his PCLS payments he was not paying any individual pension contributions. HMRC do not provide any guidance on valuing employer contributions to a Defined Benefit pension scheme for this test. HMRC may be primarily concerned about defined contribution recycling. If the DB scheme is ignored then any increase to DC contributions will exceed 30% of the expected contribution amount of nil but, is it clear whether or not the increased DC contribution is ‘because of the lump sum’? Could HMRC have expected Gunther to use his monthly pension income to foot the bill for his home improvements?

Is this condition met = maybe.

So, finally…

6. The recycling was pre-planned

An individual should be aware if they have made a conscious decision to use a PCLS either directly or indirectly to pay increased pension contributions. To determine whether recycling was pre-planned consider if the client decided to take a PCLS and to use this to fund an increased pension contribution. The order of events after making the decision to use the PCLS to fund a pension contribution is not relevant. Whether they receive the lump sum before paying the contribution or pay the contribution then receive the lump sum the recycling was pre-planned. 

The onus is on HMRC to show that pre-planning took place. They share some examples of recycling scenarios in Pensions Tax Manual.

Gunther has not met this condition (unless HMRC can demonstrate pre-planning actually took place). It was never Gunther’s intention to use his PCLS either directly or indirectly to fund his regular pension contributions. He continues in employment but is no longer a member of his employer’s defined benefit pension scheme. He has decided not to opt-in to the money purchase scheme they offer to non-eligible jobholders due to lack of fund choice. He is keen to make further provision for his retirement from his taxable income.

By working through all the conditions, at least one has been discounted which means Gunther is in the clear. PCLS recycling has not occurred.

Using PCLS and Flexi-access recycling rather than UFPLS, a client can access a lump sum from their pension (PCLS) tax free and then (within the limits of the MPAA and the limitations of the rules on lump sum recycling) trickle the crystallised funds back into an uncrystallised environment, to be potentially used to provide further PCLS or UFPLS in the future.

The Taxation of Pensions Act 2014 changed the pivotal point in respect of death benefits from the previous distinction between vested/unvested funds, to that of under age 75/age 75 and over, as such this is no longer a driver for recycling. For full details of death benefits pre and post age 75 please refer to our article on death benefits from defined contribution schemes. The operation of tax relief on contributions is in our article on tax relief on members’ contributions.

It is important to note that once a pension fund has been vested (crystallised) it is not possible to access Uncrystallised Funds Pension Lump Sum (UFPLS) nor a serious ill-health lump sum from the vested portion.

Flexi-drawdown recycling

The initial thoughts of many when thinking about flexi-access recycling might be, “with the availability of Uncrystallised Funds Pension Lump Sum (UFPLS) why the client would choose to vest their pension into Flexi Access Pension in the first place? And as such, why is recycling a Flexi-access pension even on the agenda?”.

If a client has a need to take a lump sum from their pension, but no need for any immediate income, they do have two options:

  • UFPLS, and/or
  • Pension Commencement Lump Sum (PCLS) and designate the remaining crystallised funds to a Flexi-access pension

With UFPLS, the client crystallises only the amount of lump sum required (after considering their tax position), leaving the balance of their pension uncrystallised. 25% of the UFPLS will usually be paid tax-free and the balance is liable to tax at the clients’ marginal rate. The advantage of this is that the balance of the pension funds remain uncrystallised and able to support future lump sum requirements, however, there has been an immediate tax consequence of this method of providing a lump sum, which dependent on the clients current tax position may be quite severe.

With the second option, a client can take a 25% tax-free PCLS up to the value of the lump sum required and designate the balance of the crystallised funds to flexi-access drawdown. The lump sum raised has been tax-free and there is no tax penalty.

However, although they do not need to draw any income, the balance of the funds is now crystallised, and as such can no longer provide future PCLS or UFPLS. Flexi-access recycling can allow the client to trickle these crystallised funds back into uncrystallised funds, which can in future be used to support further PCLS and/or UFPLS.

It is important to establish that UFPLS and drawing an income from a Flexi-access pension are both “Trigger events” for the purposes of Money Purchase Annual Allowance and as such will limit future money purchase contributions (including the annual recycled income) to £10,000 per annum (prior to 6 April 2023 this had been £4,000 and before 6 April 2017 it was £10,000) without a MPAA charge being applied see article on the money purchase annual allowance.

Taking a PCLS without drawing income from the drawdown fund is not a trigger event, therefore accessing the PCLS (without drawing any income from the drawdown fund) does not lead to the reduction in AA associated with the MPAA and this may be very important to certain clients.

As well as the limitations imposed by the MPAA the rules on pension commencement lump sum recycling need to be considered. 

How income recycling works

Income is taken from the Flexi-access drawdown fund and reinvested into personal pensions. This is done on a ‘gross to gross’ basis i.e. 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. It should be noted that there must be sufficient relevant earnings to support the contributions to gain the tax relief and we need to be mindful of the MPAA to make things ‘tax neutral’.

Finally, it is important to note that recycling is not always ‘bank balance’ neutral in the short term, this is covered in detail in our article on the taxation of pension income.

Why recycle?

It is generally accepted that unvested benefits are ‘better’ than vested benefits due to the availability of tax free cash (PCLS).

By lowering the flexi-access drawdown fund and increasing the personal pension:

  • a 'second' amount of tax free cash (PCLS) can be taken from the crystallised funds which are trickled back into the personal pension fund and

  • uncrystallised funds can be increased/created allowing for future UFPLS or small pot payments

However, the current and future tax position of the member should be factored in, along with the impact of any adviser charges. As the key position for recycling should be that this makes the member richer than if they left the money crystallised.

Tech Matters


Ask an expert

Submit your details and your question and one of your Account Managers will be in touch.

Submit a question

Find us on LinkedIn

Sign up below where you will be the first to see any news, views or support we think matters. 

Sign up