AVC's

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Red52
Red52 Posts: 15 Forumite
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in Pensions, annuities & retirement planning
As one of the very fortunate people with in an end salary scheme pension now aged 58 with a current salary of £43K.
I hope to retire at 62 and believe it is a no brainer to pay AVC's as when I draw my pension I can withdraw the cash tax free. The question is, should I simply pay in what I can afford each month or borrow money to live on and pay in £32K / annum, which is everything I pay 20% tax on?
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  • robin61
    robin61 Posts: 677 Forumite
    edited 10 April 2016 at 7:35PM
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    How would you fund it ? Remortgage ? You would be borrowing a lot to fund it if you are planning on doing this for 4 years.
    I guess the risk is that you cannot actually get at the AVC tax free until you take your main pension.
    That said these AVCs linked to final salary schemes are very attractive especially if they are smart AVC schemes as the contributions come from gross salary and you can also get a NI saving of 12%. Does your scheme work like this ?
    A couple of things to be aware of. You cannot get more than 25% of the value of your pension as a tax free lump sum. So if you pile a lot into the AVC you might end up with a residual AVC fund and there are likely to be certain restrictions about how you can take that depending on your scheme rules.
    Also just make sure you do not exceed the annual allowance of £40k. So this will be the amount your pension has increased in value in the year and will include what you have put into the AVC. You will be able to utilise carry forward from the last 3 years though so it sounds like this is unlikely to be an issue. Just keep an eye on it. If for example you got a big pay increase it might start to become an issue.
  • jem16
    jem16 Posts: 19,398 Forumite
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    Red52 wrote: »
    I hope to retire at 62 and believe it is a no brainer to pay AVC's as when I draw my pension I can withdraw the cash tax free.

    Presumably you have checked that your scheme does allow that as not all do. You are also limited to 25% of the total DB + AVC value.
  • Red52
    Red52 Posts: 15 Forumite
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    Presumably you have checked that your scheme does allow that as not all do. You are also limited to 25% of the total DB + AVC value.


    Hi Thanks for your message.
    Yes my scheme does allow this, and yes I understand the 25%.
    Thanks
  • Red52
    Red52 Posts: 15 Forumite
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    robin61 wrote: »
    How would you fund it ? Remortgage ? You would be borrowing a lot to fund it if you are planning on doing this for 4 years.
    I guess the risk is that you cannot actually get at the AVC tax free until you take your main pension.
    That said these AVCs linked to final salary schemes are very attractive especially if they are smart AVC schemes as the contributions come from gross salary and you can also get a NI saving of 12%. Does your scheme work like this ?
    A couple of things to be aware of. You cannot get more than 25% of the value of your pension as a tax free lump sum. So if you pile a lot into the AVC you might end up with a residual AVC fund and there are likely to be certain restrictions about how you can take that depending on your scheme rules.
    Also just make sure you do not exceed the annual allowance of £40k. So this will be the amount your pension has increased in value in the year and will include what you have put into the AVC. You will be able to utilise carry forward from the last 3 years though so it sounds like this is unlikely to be an issue. Just keep an eye on it. If for example you got a big pay increase it might start to become an issue.

    Thank you for your answer, it is appreciated.

    I guess the real question I have is how do I maximise my investment in the pension scheme? And, should I borrow money to do this (secured loan rates from a bank).
    How much is too much to put in?

    Yes the money goes in to the AVC's pre tax and NI.

    I am aware of the 25% limit on taking cash out and that I can not access this until I retire.

    I understand they will count any AVC's in with my pension as a single pot.

    I was unaware of the 40K rule but as you say if I can carry forward the last 3 yrs hopefully this should not be an issue.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    Retirement at 62: is that your normal scheme retirement age, or would there be an actuarial reduction fro going at 62? Because if there were, it might apply to the AVC too. Which might mean that it wouldn't be a brilliant idea to stick more money in. In other words, you've not told us enough.
    Free the dunston one next time too.
  • robin61
    robin61 Posts: 677 Forumite
    edited 18 April 2016 at 10:38AM
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    Just to throw another possibility in there for you. If you reduce your gross pay down to only £11k through salary sacrifice you may start to qualify for working and child tax credits depending on what your total household income is. That could potentially help you fund this.

    If you really want to do it I'd have thought re-mortgage would be worth investigating.

    As you could be borrowing the money it's worth looking into how safe it will be in the AVC. Is it invested in equities / bonds etc or is there also a safer cash option ? If not maybe you should play cautious and just put in what you can afford. Imagine the stock market taking a nose dive if you have borrowed heavily to fund this ?
  • Red52
    Red52 Posts: 15 Forumite
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    Hi the normal retirement age for my pension is 65. However, I am confident I can get my cash out at 62.
    Yes the money would could be invested in stocks and shares and could reduce if there is a crash but I could also put it in a cash account the options are for me to consider. However, how much is too much to put in to AVC's/annum over the next3/4 years? Any thoughts?
  • Red52
    Red52 Posts: 15 Forumite
    First Post First Anniversary Combo Breaker
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    Hi the normal retirement age for my pension is 65. However, I am confident I can get my cash out at 62 without a reduction.
    Yes the money could be invested in stocks and shares and could reduce if there is a crash but I could also put it in a cash account the options are for me to consider.

    However, how much is too much to put in to AVC's/annum over the next3/4 years? Any thoughts?
  • robin61
    robin61 Posts: 677 Forumite
    edited 24 April 2016 at 8:32PM
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    I would make sure that I didn' t put so much into the AVC as to exceed the 25% tax free PCLS. You' ve not said what the options are for any residual AVC fund if you put more than this in but whatever they are they won' t be as attractive as getting the whole lot out as a tax free lump sum.
    How much to put in is down to your attitude to risk really. Borrowing to do this obviously has risk if the AVC is not in a cash fund and there will be interest to pay which you need to take into account.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    Red52 wrote: »
    Hi the normal retirement age for my pension is 65. However, I am confident I can get my cash out at 62 without a reduction.

    But is your confidence well-based? Might things change in the interim? Still, if you really want to ....

    Why not start by telling us how much your pension increased in value in 15/16? Then we'll know how much space you have in your £40k. Note that it's the increase in value that matters; neither your own contribution, nor your employer's contribution, matter in themselves.
    Free the dunston one next time too.
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