Tax and Pension Help, Please!

moneyfoolish

A few years ago, I was without a job and therefore began taking a pension from a previous employment. I subsequently got another job and although I'm now 67, I'm still working. However, because I took my pension, I'm now paying 40% tax on £15,000 in total. I'm now paying into another pension scheme (the LGPS) and because of my age cannot increase contributions. I could add an AVC but I've read that unless the AVC is held for 5 years there will be hefty penalties to pay and I could retire at any time. Can anybody suggest a low cost alternative where I could put a lump sum to gain tax relief but I could get back my contributions whenever I retire without penalty?

hyubh

russell_anderson wrote: »

I could add an AVC but I've read that unless the AVC is held for 5 years there will be hefty penalties to pay

On that narrow point, there are no scheme rules about it, however the Prudential (who are the AVC provider for many LGPS funds) unilaterally added such charges a few months ago (perhaps not unreasonably: they aren't a charity, and won't be making much - if anything - from short term AVC contracts). It's possible your particular LGPS fund has another AVC provider you can choose however (e.g. Zurich) that don't impose those sort of charges, so I'd check that if I were you.

atush

Most importantly,

dont' forget that all your extra income of 15K can be put into a new personal pension plan outside LPGS and AVC and still get tax relief of 40% IF you are not over the annual 50K limit to be reduced to 40K. And you can take 25% of that tax free on retirement.

jamesd

You can just start a personal pension and put money in that to get the tax relief on the portion of your earnings over 40% tax rate.

You won't be able to get all of the capital back, of course, just the 25% tax free lump sum. The remaining 75% has to be used to provide income in some way, either with income drawdown or buying an annuity. Though if your guaranteed (final salary or similar defined benefit) work and state pension incomes combined come to £20,000 or more you could use Flexible Drawdown instead of Capped Drawdown to take out all of the pension pot, which is taxed as normal income for any amount above 25% taken out.

If you won't qualify for Flexible Drawdown you could use VCT investing to get 30% tax relief, capped at the amount of tax actually paid in the tax year. If you hold for five years or more or die you can then sell without having to repay the tax relief, sell otherwise and you will have to repay it. Risk levels of VCTs vary greatly. The income from VCTs that pay income is tax free for life. Be sure that the risk levels are appropriate for you before using this method, they tend to be higher than for ordinary fund investing. It's particularly necessary to be cautious if you have minimal experience of investing with funds, which would make VCT use probably unsuitable for you.

There aren't normally large penalties to pay for modern personal pensions. There might be penalties to pay if you had a commission arrangement with an IFA or an agreement to pay fees from the pension, with them coming out of the pension pot, and you then changed the IFA or moved the money, but that would just be to pay whatever you'd agreed to pay.