Pension Planning - use of AVCs

kidmugsy

The means is that you can buy both sorts of shares, holding the income shares in an ISA (so that your dividend is protected from higher rate tax and age allowance trap) and the capital shares outside, where you would expect to exploit your capital gains tax allowance.

Zelazny

JJWW wrote: »

Am I right in thinking that I would be able to draw the AVC fund as a lump sum because my notional pension pot would be 20 x 31 + 100 = £720K meaning that I could draw up to a notional 25% ie. £180K. I have assumed a 6% growth rate in an index linked AVC provided by the Prudential. Are my assumptions correct or do I need to rethink?

Not quite - the calculation is slightly more complex than that. You'd probably be looking at more like £130k max cash (which is still plenty for your purposes, I guess.

Technical bit follows (can't figure out if I can hide this unless people click, spoiler tags aren't quite what I'm after, anyone know?):

The government assesses DB pensions as being worth 20 times their yearly amount for calculation of the Lifetime Allowance, but the actual calculation to determine the maximum cash sum depends on the commutation factors used by the scheme. The max cash that can be taken can be calculated as:

{ (AVC fund) + [ (full yearly pension) x (commutation factor) ] } / {1 + [ 0.15 x (commutation factor) ] }

I'm not sure how that would be handled if you took some of the benefits early - I think they'd have to work out the amount of full yearly pension that you could take at that date, and go from there.

Not sure if that's clear. As an example consider:
AVC fund: £100k
Full yearly pension: £31k less 5 years ERF (at say 5% per year): £23,250 p.a.
Commutation factor (male age 60 - could be anything from 10 - 21, pick somewhere in the middle): 16

Max cash would be:

[100k + (23250 x 16)] / [1+(0.15x16)] = (100k + 372k) / (1 + 2.4)
= 472k / 3.4 = £138,823.53

to verify, this would mean 100k from AVCs, then £38,823.53 from scheme pension, causing a reduction of £2,426.47 p.a., leaving: £20,823.53 p.a.

Value of TFCS: £138,823.53
Value of Pen: 20823.53 x 20 = £416,470.60

Total: £555,294.13

value of TFCS as %age = 138823.53 / 555294.13 = 25%

jamesd

kidmugsy wrote: »

The means is that you can buy both sorts of shares, holding the income shares in an ISA (so that your dividend is protected from higher rate tax and age allowance trap) and the capital shares outside, where you would expect to exploit your capital gains tax allowance.

Were you new to the idea of putting income-producing investments inside a tax wrapper and capital gain producing ones outside? If so, corporate bond funds are the ideal ones for the ISA or pension because there's no tax on the interest inside the tax wrapper, unlike dividends where the tax can't be reclaimed just because it's in a tax wrapper.

kidmugsy

jamesd wrote: »

Were you new to the idea of putting income-producing investments inside a tax wrapper and capital gain producing ones outside? If so, corporate bond funds are the ideal ones for the ISA or pension because there's no tax on the interest inside the tax wrapper, unlike dividends where the tax can't be reclaimed just because it's in a tax wrapper.

Hardly: I said above "While one of you is a payer of standard rate tax, she could hold equities outside a "wrapper" while you use your wrappers for, say, bonds that would have their income taxed if held outside a wrapper."

jamesd

So what was new in some way about the product you linked to? It's just the usual.

kidmugsy

"So what was new in some way about the product you linked to? It's just the usual". What struck me is that in the wrapper you might opt for dividend income rather than fixed interest bond income. You'd presumably do that in hopes of being defended against inflation, long term. The idea of an IT having two different funds internally, then craftilly directing all income to one share and capital growth to the other was new to me; it's rather different from the old Split Capital IT trick. (I haven't been in touch with ITs for more than a decade, since we sold our shares in them. Has this new trick become common?)

jamesd

Thanks, that explains it - I was puzzled. This IT is uncommon, it's not normal to do it the way they did it. Normally it'd be different investments. So you're right, if you wanted to hold this particular IT, once for income and again for capital growth, you could hold some of each version.