AVCs from 2006

Tim_L

Just been reading about changes to the pension rules, and it appears that from April 2006 I'll be able to place 100% of my salary in my pension scheme.

Now as it happens I could afford to do this, for a year or two, as I have a relatively high level of savings. (I currently have a final salary scheme plus AVCs (separately managed but part of the scheme)).

This appears to mean that I'll be able to have zero income for the purposes of calculating income tax (and income for tax credits), because I can transfer my entire salary directly into AVCs, gaining all the income tax I would have paid back into my pension pot.

I realise that this money would be locked into my pension until retirement, but do any of the experts have a view on whether this is possible under the incoming rules? (I'm not looking for financial advice, just opinions).

dunstonh

Just been reading about changes to the pension rules, and it appears that from April 2006 I'll be able to place 100% of my salary in my pension scheme.

Correct. In fact you can do more than that but you will only get tax relief on the amount equal to your income.

I realise that this money would be locked into my pension until retirement, but do any of the experts have a view on whether this is possible under the incoming rules? (I'm not looking for financial advice, just opinions).

I wouldnt do it with an AVC as that gives you no flexibility on retirement date. A stakeholder/personal/SIPP pension would give greater flexibility. Remember you must take AVC benefits coupled with the occ scheme. You dont need to do that with shp/ppp/sipp arrangement. I have already had half a dozen people this year have problems with AVCs which they wouldnt have had with a personal pension. The only consideration against that is if the employer has some really good avc terms attached or you cant do a personal arrangement as you earn over 30k. AFAIA, there is no change to the link between occ schemes and in house AVCs.

This appears to mean that I'll be able to have zero income for the purposes of calculating income tax (and income for tax credits), because I can transfer my entire salary directly into AVCs, gaining all the income tax I would have paid back into my pension pot.

That does appear correct on face value.

Heres a good one to think about. If you pay in 100% of your income into a pension, you would be treated as a zero earner for working tax/childrens tax credits purposes. You could then get paid around £500pm in tax credits.

Tim_L

I should imagine that this loophole, if it turns out to be one, will be closed pretty quickly, but it is an interesting direction for anyone with savings or some sort of windfall or inheritance.

I've often thought about increasing pension contributions to increase tax credit entitlement, but have never been able to find a clear statement of how they are calculated. Any pointers?

Pal

No idea - but take a look at the similar question HERE on the benefits board.

A couple of thoughts:

Firstly, there is no point in paying AVCs from that part of your salary that is below the tax free allowance anyway. You might as well receive that as pay and then invest it somewhere else (preferably an ISA).

Secondly, it is probably dubious as to whether it will be worth paying any money into AVCs that you would have paid 10% or 22% tax on. Instead take the money out having paid the basic rate taxes, save it until next year and then pay it into AVCs claiming 40% tax relief on it.

Finally, I'm not sure if this would work but, if you pay into AVCs through a company payroll you get immediate full tax relief in that year, so you could in theory bring your income and tax bill down to zero. However if you paid to a stakeholder outside of PAYE, the provider would claim back 22%, and you would claim the remaining 18% back on your tax return.

You could then pay the 18% you get back from the revenue (or simply don't pay to the revenue) into the stakeholder the following year, claiming back another 40% on it the following tax year (22% by the provider and 18% by tax return).. repeat each year until the figures get too small to bother with.

Anyone know if this latter point would work?

Debt_Free_Chick

You will also be able to pay 100% of salary into a Stakeholder plan, as the concurrency rules will be removed in April 2006.

The advantage here is that you will have more control & freedom as Stakeholders are not "tied" to the occupational scheme run by your employer.

A SIPP would be another option.

Debt_Free_Chick

Pal wrote:

Finally, I'm not sure if this would work but, if you pay into AVCs through a company payroll you get immediate full tax relief in that year, so you could in theory bring your income and tax bill down to zero. However if you paid to a stakeholder outside of PAYE, the provider would claim back 22%, and you would claim the remaining 18% back on your tax return.

You could then pay the 18% you get back from the revenue (or simply don't pay to the revenue) into the stakeholder the following year, claiming back another 40% on it the following tax year (22% by the provider and 18% by tax return).. repeat each year until the figures get too small to bother with.

Anyone know if this latter point would work?

I think we're straying into post-2006 detail without having even draft regulations, so difficult to be sure.

However, under current rules, the tax relief wouldn't count as earned income (Net Relevant Pay) .... would it? If not, then it can't be used as the basis for Stakeholder contributions.

dunstonh

We do have post 2006 information but it does seem to leak in dribs and drabs and change a bit each time. Some things look cast in stone but this is one area that has potential to be changed.

Pal

Debt_Free_Chick wrote:

I think we're straying into post-2006 detail without having even draft regulations, so difficult to be sure.

Indeed, but the tax relief as I describe it is exactly how charity contributions currently work for a higher rate taxpayer. You give money, tick the box to let the charity claim back 22%, then you claim 18% back in your tax return. Donate the 18%, they claim 22%, you claim 18% etc etc.

I also assume that is how a FSAVC and company sponsored stakeholder plans currently work?

However, under current rules, the tax relief wouldn't count as earned income (Net Relevant Pay) .... would it? If not, then it can't be used as the basis for Stakeholder contributions.

Correct, but I am assuming that the following years income would be made up of earnings from employment and tax relief, and that the "new" AVC contributions would be paid from the taxed earnings rather than from the tax relief cheque.

DavidLaGuardia

Pal wrote:

No idea - but take a look at the similar question HERE on the benefits board.

I'm not sure if this would work but, if you pay into AVCs through a company payroll you get immediate full tax relief in that year, so you could in theory bring your income and tax bill down to zero. However if you paid to a stakeholder outside of PAYE, the provider would claim back 22%, and you would claim the remaining 18% back on your tax return.

You could then pay the 18% you get back from the revenue (or simply don't pay to the revenue) into the stakeholder the following year, claiming back another 40% on it the following tax year (22% by the provider and 18% by tax return).. repeat each year until the figures get too small to bother with.

Anyone know if this latter point would work?

Pal, interesting but there is no addtional benefit doing this as you only ever get the same effective increase on each premium you pay. the best way I can demonstrate is as follows (each 18% of the previous premium being put in again)

(Sorry these should be alligned in columns)

Gross
78.00 18.00 4.15 0.96 0.22 0.05 0.01

Net
100.00 23.08 5.33 1.23 0.28 0.07 0.02

Total Relief
22.00% 36.63% 39.25% 39.83% 39.96% 39.99% 40.00%

It is far less complicated to do this to achieve the same thing:

Gross 130.00
Net 101.40
Reclaim 23.40

Cost 78.00