New Job / new Avc: Advice on maxing out.

bitofatit

I'm 54 and took early retirement last year. I have a C Service pension which is taxed 712L.

I start work full time in a couple of weeks and am told re Tax that

"as [yr tax allowance] is already in use against your pension income we are obliged to operate a BR tax code. This means you will be paying more tax against your earnings". I'm not sure what his means possibly that all of my earnings will be taxed at the appropriate rate - mostly at 20% and a small proportion at the higher rate (40%?).

Finally...my question - I don't want to pay any more tax from my new salary and was thinking I'd invest in an AVC to take advantage of the boost to contributions. How do I calculate what percentage I should plump for to try to reduce my tax to as near as zero each month.

As I'm writing this I'm thinking that the answer might be 100% of my salary??

Hope I've explained the situation

thanks in advance

BoaT

dunstonh

How do I calculate what percentage I should plump for to try to reduce my tax to as near as zero each month.

You can go to 100% of your salary or £50,000 whichever is the most. If you have a defined pension scheme, then you will have to look at the equivalent monetary value. Scheme booklets will often give you how to work this out but you need the latest ones. I suspect many have done re-prints since the announcement of lowering the annual allowance down to £50,000 as higher earners are more likely to breach the £50k limit with a defined benefit scheme than at any time before.

AVCs are largely obsolete nowadays. There are a few unusual cases where they are still the best option but in most cases you tend to find the alternatives offer better value and/or better flexibility and investment choice.

bitofatit

I'm joining a local authority who give access to the LGPS which is a defined benefit scheme. TBH this job is for 2 years only and I was thinking that if I pay (say) £4 - £5k in Tax then that if I put this amount into the group AVC I would benefit from the tax relief on the contributions.

The Council have an arrangement with prudential who take a charge of around .75% [not sure if this in on the contribution or the fund as it builds up]. I was thinking of investing in medium to high risk equities in their managed equity funds for the 2 years of my contract then leaving it in there until I'm 65.

kidmugsy

I'd be tempted to go for some variety of personal pension rather than an AVC so that I would decouple the age of crystallising the new pension from the age of drawing the LGPS pension. Unless your plan is eventually to withdaw the AVC as tax-free cash so as to maximise your pension from the LGPS.

I can see why you are keen to shield the bit of your income exposed to 40% tax from it; the bit exposed to 20% tax I'd be less worried about in your shoes. I'd perhaps look at an S&S ISA instead. Unless, as I say, you have subtle use of the AVC in mind.

bitofatit

kidmugsy wrote: »

I'd be tempted to go for some variety of personal pension rather than an AVC so that I would decouple the age of crystallising the new pension from the age of drawing the LGPS pension. Unless your plan is eventually to withdaw the AVC as tax-free cash so as to maximise your pension from the LGPS.

I can see why you are keen to shield the bit of your income exposed to 40% tax from it; the bit exposed to 20% tax I'd be less worried about in your shoes. I'd perhaps look at an S&S ISA instead. Unless, as I say, you have subtle use of the AVC in mind.

Intriged by "subtle use of the AVC" I wonder what you had in mind.

In terms of the value of tax relef I can't get my hea around not investing into an AVC when for every £ I invest the Gov't effectively subsidies me - o.e. each £1 cost me 80p. Why is that less value for money than a Sand S ISA. I was thinking longer term to marry this small pot up with other pots and think about a drawdown solution.

Anyway if someone could answer my initial query that would be cool and then I'd be intrigue to understand the VfM question.
Cheers
BoaT

Old_Slaphead

bitofatit wrote: »

In terms of the value of tax relef I can't get my hea around not investing into an AVC when for every £ I invest the Gov't effectively subsidies me

But it's likely to be taxable income when you draw money from the pension fund so the government gets most of it's money back (but not on on all of it if you take the 25% tax free cash)

jem16

bitofatit wrote: »

Intriged by "subtle use of the AVC" I wonder what you had in mind.

It's explained in his first paragraph.

With some schemes it's possible to take the tax free lump sum solely from the AVC pot as opposed to 25% from the main scheme and 25% from the AVC pot.

CLAPTON

bitofatit wrote: »

I'm 54 and took early retirement last year. I have a C Service pension which is taxed 712L.

I start work full time in a couple of weeks and am told re Tax that

"as [yr tax allowance] is already in use against your pension income we are obliged to operate a BR tax code. This means you will be paying more tax against your earnings". I'm not sure what his means possibly that all of my earnings will be taxed at the appropriate rate - mostly at 20% and a small proportion at the higher rate (40%?).

Finally...my question - I don't want to pay any more tax from my new salary and was thinking I'd invest in an AVC to take advantage of the boost to contributions. How do I calculate what percentage I should plump for to try to reduce my tax to as near as zero each month.

As I'm writing this I'm thinking that the answer might be 100% of my salary??

Hope I've explained the situation

thanks in advance

BoaT

firstly why do you have a tax code of 712L when the standard one is 747L?

secondly a BR code simply means that you get taxed at 20% on all the earning in that job.
this is fine if you total taxable income is less than 7475+ 35,000 but means you are undertaxed if your total taxable income is above that


if you are joining local goverment then are you joining the Local government pension scheme?
That would surely be you first step rather an AVCs or a private pension

Your question about not wanting to pay more tax on your salary isn't clear.

Saying how much your pensions / earnings and other incomes would make the whole issue a lot easier to address.

dunstonh

In terms of the value of tax relef I can't get my hea around not investing into an AVC when for every £ I invest the Gov't effectively subsidies me - o.e. each £1 cost me 80p. Why is that less value for money than a Sand S ISA. I was thinking longer term to marry this small pot up with other pots and think about a drawdown solution.

Income is taxable in retirement. If at 65, you earn over £24,000, you get an additional tax on you. For ever £2 over £24,000 you lose £1 of your age allowance. So, as you get closer to that figure in your projections, you have to be careful that you are not getting basic rate tax relief on your contributions only to pay around 30% on the income in retirement. If you are getting high rate relief then its not as bad but the gain is not so good.

There is a very rough guide that says you should make sure that you and your spouse are using up your £10k personal allowance in retirement from pensions (that way you get tax relief on your contributions but no tax in retirement). From £10k to £24k, pensions still slightly have the advantage over S&S ISAs but the difference is very small unless you are a higher rate tax payer. Over £24,000 then S&S ISAs have the advantage unless higher rate but even then then gain is very small and death benefits favour ISA.

If you are thinking drawdown, then that is another reason not to use an AVC. The charges on the Pru plan are not great and easily beaten by IFA plans or DIY plans. Plus, you dont have to use the limited fund range of the Pru contract

sleepless_saver

bitofatit wrote: »

In terms of the value of tax relef I can't get my hea around not investing into an AVC when for every £ I invest the Gov't effectively subsidies me - o.e. each £1 cost me 80p. Why is that less value for money than a Sand S ISA. I was thinking longer term to marry this small pot up with other pots and think about a drawdown solution.

You probably already know this, but just in case not .... you would get the same tax benefits with other sorts of pension eg personal pensions as you would with an AVC. So no need to confine your options to AVC or S&S ISA.

Loughton_Monkey

You are probably doing the right thing, by trying to avoid as much tax as possible.

I don't believe you should look too hard at S&S ISA's - at least until you have exhausted pensions.

In terms of 'efficiency' in building up a pot of money, then pensions are 6.25% better than ISA's. The 'negative' price associated with that 6.25% is 'conditions' as to the way you can access that money.

I really don't understand your fixation with AVC's. They went out not long after flaired trousers - apart from one or two "special" AVC arrangements which somehow enhance Final Salary Schemes. If you have such an AVC scheme with your new employer, then look at it, by all means, but maybe it's nothing special. They offer absolutely nothing (in terms of tax relief) that 'ordinary' pensions don't.

So your first port of call should be a spreadsheet to model how your existing pension will provide an income, and how new pension contributions - to the maximum amount - will nullify all your tax and grow into a large pension pot. By taking the 25% tax free lump sum, you are effectively pocketing 25% of the HMRC 25% 'free' money added to your contributions. The rest gets clawed back in 20% tax, sadly, when you draw the pension. But 25% of 25% is 6.25% better than an ISA - provided you would have invested in exactly similar funds in either pension or ISA.

If and when your Civil Service pension (plus state pension if necessary) exceeds £20,000 a year, then you additionally have the option of "Flexible Drawdown" - which potentially gives much more flexibility in how you take your pension pot out.

But your spreadsheet should warn you if you are in danger of (a) denuding yourself of 'cash' in retirement, and (b) having pension income so high that it gets you into higher rate tax. It should also give you a picture of your total cash flow in retirement. Make sure it is not too one-sided. All cash and no income is not desirable. All income and no cash can also be undersirable. I consider my own position to be 'comfortable'. I have early retired, and pensions will ultimately provide around 60% of my spending. I have enough cash to draw on to provide the other 40% right up to age 90 at least.