As pensions become more and more of a worry, we are warning clients to avoid getting caught up in “pensions recycling”.

Pensions recycling involves a scheme whereby a member withdraws their tax-free lump sum from the pension fund, as part of a phased retirement. This is permitted under the new rules of pension simplification.

However members then reinvest the lump sum back into the member's scheme, which attracts a tax credit on the contribution. If the scheme member was a higher rate tax payer, further tax relief against the individual’s personal tax liability is also gained. This is not permitted and some scheme members have even been known to repeat this process four times which can double the individual’s pension plot. However HM Revenue and Customs has now issued draft legislation to prevent this.

Getting the most out of your pensions is naturally one of the key financial issues for most individuals. However any scheme you enter into should always be within the law.

The new draft clause of the Finance Bill 2006 makes it clear that reinvesting lump sums back into a member’s scheme is not permitted.

While this new legislation is likely to only affect a small number of individuals, it’s worth seeking advice now to make sure you are within the law.