Pebsion novice in final salary scheme.

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
3 replies 705 views
ath007ath007 Forumite
140 Posts
Part of the Furniture 100 Posts
I am in a final salary scheme paying 6% contributions. I beleieve i can contribute up to 9%into another pension vehicle(avc?) through my employer.

This year i have breached the 40% pay barrier and as the barrier is falling to approx £42k come april i am hearing talk at work of peolpe taking up additional pension as they can claim tax back.

I am no expert but could anyone answer the following.

1. I am normally a standard rate tax payer but have breached the 40% tax threshold due to overtime/bonuses etc. If i were to be contributing to an AVC can i claim 40% tax relief or will it just be 20?% as i am normally just a basic rate tax payer. Its this 'breaching' late on in the pay year when i earn more that pushes me into 40% tax.

2. How is tax claimed back on avc contributions? self assessment?

3. maths.....

hypothetically if i payed in £60k(over many years) my fund would be £100k.
You could say that paying in £55k my fund would be £100k taking in account for interest and bonuses on the avc.
i can take 25% of the avc fund at maturity so that equates to £25K. My pension of £75k to buy an anuity has therefore cost me as little as £30k over the term (55k contributions - £25k cash draw off).

do i make sense?

The Novice - thanks

Arthur

Replies

  • Loughton_MonkeyLoughton_Monkey Forumite
    8.9K Posts
    Hung up my suit!
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    When paying into a pension, you normally get 20% tax relief. You then pay 20% tax on the pension when you finally draw it. But taking the tax free 25% lump sum means that some of that tax relief stays in your pocket. And so investing extra into a pension is usually worthwhile, provided you are happy receiving it as income (and a 25% lump sum) at retirement.

    If you are paying tax at 40%, then pension contributions become extremely tax efficient, provided you will only pay basic tax relief on the pension when you take it.

    The way it normally works is that for every £80 you physically pay, that amount becomes £100 within your pension account. But if a higher rate tax applies, you claim the extra £20 via your self-assessment tax form. So calculate the amount of salary which will attract 40% tax [let's for example, say it were £3,200]. Then you physically pay 80% of that [£2,560 in my example]. Another £640 would then be deducted from your tax bill at the end of the tax year.

    You need to get the contribution in by 5th April, which might mean doing it for your March salary.
  • kidmugsykidmugsy Forumite
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    "But if a higher rate tax applies, you claim the extra £20 via your self-assessment tax form." Is that true even for an AVC, LM?
    Free the dunston one next time too.
  • jem16jem16 Forumite
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    ath007 wrote: »
    I am in a final salary scheme paying 6% contributions. I beleieve i can contribute up to 9%into another pension vehicle(avc?) through my employer.

    This year i have breached the 40% pay barrier and as the barrier is falling to approx £42k come april i am hearing talk at work of peolpe taking up additional pension as they can claim tax back.

    I am no expert but could anyone answer the following.

    1. I am normally a standard rate tax payer but have breached the 40% tax threshold due to overtime/bonuses etc. If i were to be contributing to an AVC can i claim 40% tax relief or will it just be 20?% as i am normally just a basic rate tax payer. Its this 'breaching' late on in the pay year when i earn more that pushes me into 40% tax.

    You would be able to claim 40% tax on the amount that you breach the 40% tax threshold. As it's a final salary pension it would normally be paid from your gross salary so tax relief is immediate and no need to claim anything.
    2. How is tax claimed back on avc contributions? self assessment?

    If the AVC is paid from your salary ( as would be normal) then tax relief is immediate and no tax is claimed back. AVCs paid from net salary would normally be FSAVC and don't really exist now.
This discussion has been closed.
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