Reminder: Why the pension recycling rules are important to keep in mind ahead of the 2025 Autumn Budget
This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.
Recently, we’ve seen a significant increase in people getting in touch with us about paying contributions or drawing benefits from SIPPs due to the ongoing Budget speculation.
On 26 November, Rachel Reeves will deliver her second Budget for Labour. The unusually late date for the announcement gives extra time for anticipation and rumours to build.
There has been the usual press speculation that pensions are going to be in the chancellor’s crosshairs. In particular, commentators are suggesting restrictions on the pension commencement lump sum (PCLS), tax-relievable contributions, or both.
As Reuters reported in September, the UK’s borrowing has exceeded expectations, putting more pressure on Reeves to raise government income.
After what felt like a period of prolonged stability, pensions have been subject to some notable changes over the past couple of years. These include the removal of the Lifetime Allowance (LTA), the introduction of the Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA), and the inclusion of pensions in the scope of Inheritance Tax (IHT) from April 2027.
We do not know any more about what is likely to be announced than what we read in the press. Advisers tell us that clients want to make pension decisions on matters where they cannot provide guidance.
Meanwhile, the number of benefit payment requests we receive has risen, and clients are contacting us directly to ask what they should do.
While we cannot help with the crystal ball gazing, there are a couple of areas around the Budget and pensions that we have been speaking with advisers about over the last few weeks. We thought it would be useful to cover these below.
A brief reminder of the recycling rules
Recycling often seems like a niche pension rule that most people know about, but it can easily be forgotten in the confusion leading up to a Budget.
Simply, these rules exist to prevent individuals from taking advantage of pension tax relief on both the way in and out of their fund.
As HMRC describes it:
“The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved contribution to a registered pension scheme.”
Like much HMRC guidance, the recycling rules are slightly subjective. However, the pensions tax manual does provide clearer details on when the recycling rules would apply:
“The recycling rule applies in respect of all pension commencement lump sums paid on or after 6 April 2006, where those lump sums are used as part of a recycling device, regardless of when the significantly increased contributions are actually paid.”
In short, the recycling rule typically applies if all the following conditions are met:
- The individual receives a PCLS.
- The lump sum results in contributions to a registered pension scheme being significantly higher than they would otherwise be.
- The additional contributions are made by the individual or by someone else, such as an employer.
- The recycling was pre-planned.
There are further criteria that need to be met for the recycling rule to apply.
Firstly, the amount of the PCLS, combined with any other lump sums taken in the previous 12 months, must exceed:
- £7,500 for events on or after 6 April 2015, or
- 1% of the standard LTA for events before 6 April 2015.
Additionally:
- The cumulative amount of the additional contributions exceeds 30% of the PCLS.
The pensions tax manual contains more detailed information about recycling.
We urge advisers and clients to seriously consider the recycling rules before making any decisions on pension contributions or benefit withdrawals before the Budget.
The pension commencement lump sum and cooling-off periods
Like last year, we have received several queries as to whether a cooling-off period applies to the PCLS.
People have suggested that they may look to take their full 25% tax-free entitlement due to fears that this may be restricted in the Budget. But, should no announcement be made and the PCLS position remains as it is now, those who withdraw would then want to execute their right to a 30-day cooling-off period to return the monies, putting the SIPP back into an uncrystallised position.
However, in September, both HMRC and the FCA confirmed that these 30-day windows do not have tax exemptions.
In its September 2025 newsletter, HMRC stated that:
“Once lump sums are paid, the associated tax consequences (including the use of the individual’s Lump Sum Allowance and Lump Sum Death Benefit Allowance) cannot be undone, even if the payment is returned or cancellation rights are exercised.”
The newsletter goes on to say that:
“It is essential that they ensure customers understand that, once paid, the tax consequences of these lump sums (including any use of the individual’s Lump Sum Allowance and Lump Sum Death Benefit Allowance) will not be reversed, even if the payment is subsequently returned.”
The FCA confirmed that cancellation rights do not apply to the PCLS under its COBS handbook rules.
Get in touch
If you want to have a chat about the potential of SIPPs for your clients, or any other aspects of pension planning, please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.