AVC Query

AEC60

I'm in the Local Government Pension Scheme and intend retiring in May. I started paying just under half my monthly salary into an AVC run by the LGPS provider in December 2008. The payments go into their Deposit Fund. I know you can pay up to half your annual salary into an AVC in the final year before retirement. As I have only a few months to go before I retire, my AVC payments in this last year before retirement will be a lot less than they would have been if I had started paying last May. Can I make up for the shortfall by paying a lump sum into my AVC and is this a good idea? Thoughts from those of you who know more about this than I would be much appreciated.

artha

AEC60 wrote: »

I'm in the Local Government Pension Scheme and intend retiring in May. I started paying just under half my monthly salary into an AVC run by the LGPS provider in December 2008. The payments go into their Deposit Fund. I know you can pay up to half your annual salary into an AVC in the final year before retirement. As I have only a few months to go before I retire, my AVC payments in this last year before retirement will be a lot less than they would have been if I had started paying last May. Can I make up for the shortfall by paying a lump sum into my AVC and is this a good idea? Thoughts from those of you who know more about this than I would be much appreciated.

Don't know anything about the LGPS but I'm sure someone will come along soon who does.

AS far as AVC contributions are concerned, I understand that you are now allowed to put up to 100% of your salary into contributions and if the individual scheme allows it you can take it all back out as tax free cash when you retire (providing you don't exceed certain limits)

I am reasonably sure that I will be granted voluntary redundancy at the end of Feb which means that, with 3 months notice, I will retire at the end of May/Ist week in June. I have just started putting a large portion of my salary into a cash AVC fund with the intention of taking it in May as tax free cash. The only things stopping you putting all of your monthly salary in is that you still have to pay NI and is it worth putting in money that isn't taxed (personal allowance). I'm sure others may give additional information

Jennifer_Jane

I'm retiring end-August 09, and have been putting £600 away in ACs in order to get the 25% tax-free amount. This is going into a cash fund within the AC choice, so will also increase by an en eeny-weeny amount. But am doing it as 20% (I'm basic rate tax payer), makes it the best investment possible, and completely safe.

The limit was one given by the fund, but I could have tried to get more into the fund. The absolute limit, of course, is that you have to leave sufficient salary to pay tax/NI and other outgoings off your salary.

Jen
x

artha

Jennifer_Jane wrote: »

This is going into a cash fund within the AC choice, so will also increase by an en eeny-weeny amount. But am doing it as 20% (I'm basic rate tax payer), makes it the best investment possible, and completely safe
x

Not if you are in the Standard Life Pension One Sterling Fund! (allegedly a cash fund) see posts on this section and BBC Money Box today

Jennifer_Jane

artha wrote: »

Not if you are in the Standard Life Pension One Sterling Fund! (allegedly a cash fund) see posts on this section and BBC Money Box today

Oh dear! So sorry to hear that!

Jen

Drumtochty_2

In your final year before retirement there is no upper limit as to what the employee can put into your pension pot, subject to the lifetime allowance which is around £1,800,000 or an annual pension of around £90,000. Not really a limit for most people.

In reality it is only worth an employee putting in the pot what you get tax relief on. That being your taxable salary, have a chat with your wages department to agree the amount. In your case for the end of the tax year and also for April and May which are in the next tax year.

Some pension schemes but not all will allow you to take all of that employers arranged AVC fund (not any AVC fund arranged by others) as a tax free cash up to approx 5 times your pre commuted final salary annual pension plus 25% of the AVC fund. This equates to approx 6.7 times your pre commuted annual pension. Also agree these exact numbers with your pension people they vary with age in some cases.

Any tax free cash taken from the final salary fund is subtracted from the 6.7 times figure. It is worth taking a bank loan at 7% APR to do this.

The other thing you have to agree with the pension fund admin is whether you can do this or not.

If you can invest 100% of your taxable salary then it is worth putting in a lump sum just at the last moment again agree these dates with the wages department as they may want the money in February for the end of the 08/09 tax year and also late in March early in April to capture your April and May taxable salary.

artha

Drumtochty wrote: »

Any tax free cash taken from the final salary fund is subtracted from the 6.7 times figure. It is worth taking a bank loan at 7% APR to do this.

Can you explain this one in slightly more detail (please)?

Pixieboy

Lump sum payment isn't possible. Contributions must be made from pensionable pay. Limit is 50% from each payment.

Drumtochty_2

Pixieboy wrote: »

Lump sum payment isn't possible. Contributions must be made from pensionable pay. Limit is 50% from each payment.

Ok that is an employer rule that you have been advised of.

So basically maximise it.

Drumtochty_2

artha wrote: »

Can you explain this one in slightly more detail (please)?

Since "A" Day April 2006 in a final salary pension scheme, the law allows you to take 5 times your annual pension as a Tax Free lump sum. The downside is that in most cases the reduction in final salary pension that you receive in order to get the lump sum is far too draconian. Not all final salary schemes have rewritten their pension scheme rules to include this change; it used to be a 2.25 multiplier.

If you have an AVC run by the employer when you retire the AVC fund give the employer the cash to invest it in an Annuity for you.

If the pension scheme people are switched on and are out to help the employee. They can give you the final salary lump sum but use the cash from the AVC to replace that. So no reduction in your final salary pension.

You are also allowed to take 25% of the AVC fund as a tax free lump sum. So if 75% of the AVC is equal to 5 times your fs pension. 100% of the AVC is approx 6.7 times your fs pension.

If your fs pension is £20k per annum when you retire and you have £134k in your AVC then happy days. If less you can either take the whole AVC or add on a smaller amount from the TF pension lump sum with a smaller reduction in the FS pension.

Ok, you retire June 2010 and today you have £40K in your AVC. You earn say £50K PA; take off pension contributions and personal allowance which is say £10k in total. So you can write a cheque this month for £50-£10k so £40K to your employer.

Your employer gives you an immediate tax rebate of say £9,000 so your loan is £31k, assume 7% apr over approx 1.33 years. Then Feb 2010 the same but for 0.33 year and in May 2010 £8k three months money less £1.6 tax relief for a month or so.

Result Loan of £70k less £19.6K immediate tax rebate plus interest say £4 K total outlay £54.4K.

End June 2010 you get a lump sum of £70k. Put it all in a cash fund and get some interest and possibly some small charge for the transaction should be less than the interest.

Mortgage_&_debt_free

LGPS enables you to take up to 100% of your AVC as a tax-free lump sum, providing this doesn't exceed 25% of your lifetime limit.

To calculate your LTL multiply your annual final pension x 20.

This is something I am doing for my retirement as it's a no-brainer - tax relief on the way in & tax relief on the way out.