AVCs and tax

chesky369

I have a stakeholder which I contribute £100 per month to - then an additional sum from the nice tax people is added. Does the same apply to my AVCs to my company pension? It's a separate, money-purchase AVC scheme, running alongside the final salary scheme.

Debt_Free_Chick

chesky369 wrote:

I have a stakeholder which I contribute £100 per month to - then an additional sum from the nice tax people is added. Does the same apply to my AVCs to my company pension? It's a separate, money-purchase AVC scheme, running alongside the final salary scheme.

Kind of yes ...

With your stakeholder, you pay £78 and £100 gets paid into your pension.

With the AVC, your payslip will show a deduction of £100, but the deduction from your net pay is actually only £78.

In both cases, you pay £78 but £100 gets invested.

This assumes you pay basic rate tax - there's a complication if you pay higher rate tax @ 40% - do you?

chesky369

yes, I do. But I understand that the higher amount gets invested in the stakeholder - because I can see it on the website, if you follow me. But DOES the higher amount get invested with AVCs, because on my annual statement it says 'xxx contribued by you' which is the lower amount.

Debt_Free_Chick

chesky369 wrote:

yes, I do. But I understand that the higher amount gets invested in the stakeholder - because I can see it on the website, if you follow me. But DOES the higher amount get invested with AVCs, because on my annual statement it says 'xxx contribued by you' which is the lower amount.

OK then .. this is the position with a higher rate taxpayer.

With your Stakeholder, you pay £78 and the pension provider invests £100 for you (they get £22 from the tax man). You then tell the inland revenue that you've paid this contribution and they give you back £18 in your tax code.

With the AVC, the deduction is £100 but it actually only costs you £60 as you save £40 in tax immediately.

In either case, £100 is invested. With the AVC, you get a £40 discount (via tax relief) immediately. With the Stakeholder, you get a £22 discount now and a further £18 discount in the next tax year.

The sums are the same, but the timing of the tax relief is different.

HTH

chesky369

Thanks - clearer now.

dunstonh

You should also look at the AVC again and see if its doing what you want. The link to the occupational scheme can be a pain if you want early retirement (or phased retirement) and the investment options with many AVCs are quite poor. The old reason for doing AVCs was that they were cheap. Nowadays, the other the pension plans have caught up and with the changes in pension rules, you could find a personal pension (inc stakeholder) or ISA proves to be a better option now.