AVC or Stakeholder

oceanblue_3

Nevertheless, it is worth checking the P60 from April 2001 - it is probable that the P60 earnings will be less than £30,000.00. If this is the case, then the "added years" route need not be the only option. I would recommend this for any client of mine, rather than leave them with the mistaken belief that, because they currently earn £35,000.00, they are not eligible to contribute to a Stakeholder Pension.

andyyorks

Thanks Oceanblue, I had heard something similar to this before which is why I posed the question here. My salary might have been below £30k is April 2001 so I'll go hunting my P60 details.

DD remember it's very easy for teachers to move up the ladder quickly and obtain salary increases as there are so many leaving with stress!

Thanks again, Andy

Pal

DD remember it's very easy for teachers to move up the ladder quickly and obtain salary increases as there are so many leaving with stress!

If this is true look carefully at the added years AVC option. Good salary rises are what makes added years more attractive and it does reduce the risk you are taking quite substantially compared to a stakeholder.

ianfra_2

I'm in a final salary scheme, which looks secure - the new contributions to make it secure have changed to 7% from employees and 17% from the Company, which I'm very happy with ;D. I'm 60, have 37 years in the pension fund and earn £39k.
My question is regarding AVC's - I pay maximum AVC's i.e. another 8% of salary (15% total). The benefit is that it saves me 40% tax (obviously I'll eventually pay 22% when I get my pension - which to me means I'm making 18%). Could I do better by paying the money into another scheme rather than AVC's? ::)

oceanblue_3

Given your age, and the fact that you have 37 years' service out of a probable maximum of 40, you need to consider carefully a number of questions:

(a) for how much longer do you think you will be a contributing member of the scheme?

(b) what are your total earnings - for example, does overtime add significantly to your pensionable salary of £39,000.00?

Remember - AVC's are designed to help you reach your maximum pension, which could be 40/60ths of £39,000.00. Additional service and/or contributions could lead to a potential breach of your notional maximum pension. If this were to be the case, then you would have to cease contributions to the AVC scheme.
Nevertheless, the advantage of AVC's is that they are usually subject to very low charges, and you receive immediate tax relief at your highest marginal rate. However, they are generally capable only of generating a taxable pension income, and no tax-free cash.

Contributions to a Stakeholder contract are also subject to low charges, but provide immediate tax relief at only 22%, and the rest is received via an adjustment to your Tax Code following submission of a tax return. Nevertheless, you have the choice to take up to 25% of your fund as tax-free cash.

One or two points to be aware of:

(a) depending upon how long you have contributed to your AVC, you may be able to use it to provide tax-free cash.

(b) despite the fact that you currently earn well over £30,000.00, you may still be eligible to contribute to a Stakeholder contract if, at any time since April 2001, your P60 earnings have shown an amount less than £30,000.00 ("P60" earnings exclude both superannuation and AVC contributions).

(c) from April 2006, it is anticipated that most of these complexities will disappear. It is possible (and no-one really knows for sure yet) that AVC's will be able to produce tax-free cash. It is also possible that current rules applying to the maximum pension you can receive from your occupational scheme will also disappear. The combination of these two changes could allow you to retire on a pension larger than 40/60ths of your final salary, and with a tax-free cash amount larger than current commutaion rules allow.

I recommend that you speak to an IFA because his or her advice could save you a great deal of time and money! This is a fairly complex area for you; it also involves pretty significant potential incomes for you and you family (just think of how much pension you/your widow(er) would receive if you were to live on an income of 40/60ths of £39,000.00 for 30 years!), so be prepared to pay for the help you receive from your IFA.