Options for additional pension contributions - higher rate tax payer

Deneb

I would appreciate any input or thoughts on my current situation and proposals to mitigate 40% tax liability by making additional pension contributions.

I am 55 years old, and my current income consists of an index linked pension, which commenced last year, and income from my current employment. I am paying pension contributions through my current employer into the LGPS.

For the current year 2012-13, I estimate that I will have a higher rate tax liability of about £6450, and whilst I appreciate that I am fortunate to be in that position I am seeking to minimise my tax liability by paying additional pension contributions. In part this is also due to the fact that my OH is intending to retire in three years time aged 55, also with an index linked defined benefit pension, but which will be actuarily reduced for early retirement. I would also like to retire sooner rather than later, by which I mean that I am not looking to continue in full time employment much beyond 60, and it makes sense to use some of my additional income now to increase our income or savings in retirement.

As a member of the LGPS, I have options to either purchase additional pension in multiples of £250 pa, or to pay contributions into the LGPS AVC scheme managed by Prudential.

The cost of purchasing additional pension over 12 months would be just under £3,600 for £250 pa pension, and just under £7,200 for £500, prior to any tax relief being applied.

Alternatively, I could arrange to make payments of any amount I wished into the AVC scheme. The benefit of this seems to me to be that I can take up to 100% of my AVC contributions as a tax free lump sum at the same time as I take the rest of my LG pension, subject to the amount in the AVC pot not exceeding 25% of the value of all my pension funds combined. Would my current pension already in payment be factored into this value? I didn't take a tax free lump sum from that pension, so if it were included in the calculations there would be no problems with taking the entire AVC contributions as a lump sum. If not, the AVC pot would almost certainly exceed 25% of the value of my LGPS pension, and I (perhaps irrationally) have an aversion to going down the route of buying an annuity. The amount likely to be in the AVC will probably be pretty small in the scheme of annuity purchases anyway.

The benefit of purchasing additional pension is that it would be index linked, and includes dependant benefits, but is it good value for the cost involved?

Alternatively, is it possible to mix the two options - by purchasing £250 additional pension for instance, and putting additional amounts into the AVC scheme up to the amount of my higher rate liability each year? I'm just thinking that if I did that, I would have part index linked additional pension and an AVC pot more likely to not exceed 25% of the value of the LG pension.

Or, are there any other options that I should perhaps consider?

Sorry for the length of this post!