AVCs question

Backbiter

My wife is in the Teachers' Pension Scheme, and for the past 21 years has also been paying £30 a month into AVCs with the Legal and General (not the Pru, which runs the Teachers AVC scheme).
She had planned to retire at 60 (in 9 years' time), but the Gov't changes raised her retirement age to 65, and early retirement will wipe '000s off the value of her annual pension if she finishes at 60.
She is now a higher rate tax payer after the changes to the tax threshold, so my understanding is she is entitled to higher rate tax relief on her AVCs. Is this correct?
If this is the case, would it not make sense for her to put far more into her AVCs, as each additional £100 a month would only cost her £60 net? So if she were to put in, say, an extra £270 a month into AVCs, bringing her net contributions to £300 a month, this would be boosting her AVCs by £500 a month, or £6000 a year.
So by the age of 60, her AVCs would give her a healthy sum with which to top up her pension and offset the actuarial reduction she faces by retiring 5 years before her new official retirement age.

I/ we would be really grateful if someone can advise us on this . It seems a very sensible thing to do but all our research so far - including contacting the L & G - have produced no clear guidance either way.

TH1878

Backbiter wrote: »

My wife is in the Teachers' Pension Scheme, and for the past 21 years has also been paying £30 a month into AVCs with the Legal and General (not the Pru, which runs the Teachers AVC scheme).
She had planned to retire at 60 (in 9 years' time), but the Gov't changes raised her retirement age to 65, and early retirement will wipe '000s off the value of her annual pension if she finishes at 60.
She is now a higher rate tax payer after the changes to the tax threshold, so my understanding is she is entitled to higher rate tax relief on her AVCs. Is this correct?
If this is the case, would it not make sense for her to put far more into her AVCs, as each additional £100 a month would only cost her £60 net? So if she were to put in, say, an extra £270 a month into AVCs, bringing her net contributions to £300 a month, this would be boosting her AVCs by £500 a month, or £6000 a year.
So by the age of 60, her AVCs would give her a healthy sum with which to top up her pension and offset the actuarial reduction she faces by retiring 5 years before her new official retirement age.

I/ we would be really grateful if someone can advise us on this . It seems a very sensible thing to do but all our research so far - including contacting the L & G - have produced no clear guidance either way.

Doesn't quite work like that I'm afraid.

She will only get higher rate tax relief on the amount of income that she is over the HRT band. So if she earns £1,000 more than the HRT band, she will only get higher rate tax relief on the £1,000 and this will be used up by the Teachers pension scheme.

If she still wants to retire at early, she could perhaps consider saving the excess amount in another pension (that she could draw early) or into ISAs to help provide income between the date she retires and the date she starts drawing income from her pension scheme.

Backbiter

She earns just over £50k, so she should be due the higher rate on her AVCs, shouldn't she? She pays about £500 a month into the TPS.

hyubh

Backbiter wrote: »

My wife is in the Teachers' Pension Scheme, and for the past 21 years has also been paying £30 a month into AVCs with the Legal and General (not the Pru, which runs the Teachers AVC scheme).
She had planned to retire at 60 (in 9 years' time), but the Gov't changes raised her retirement age to 65

When did she join the TPS? Given her age, if it was before 2007 (and there's been no break) then surely she will stay in the final salary scheme with a protected NPA of 60 (assuming by 'retirement age' you meant her normal pension age in the TPS):

https://www.teacherspensions.co.uk/faqs/public-faqs/scheme-membership/what-is-my-normal-pension-age.aspx

https://www.teacherspensions.co.uk/reform/members/at-a-glance.aspx

TH1878

Backbiter wrote: »

She earns just over £50k, so she should be due the higher rate on her AVCs, shouldn't she? She pays about £500 a month into the TPS.

Her pension contributions into the Teachers pension scheme will immediately receive higher rate tax relief through the 'Net Pay' method where her pension conribution is deducted from salary before tax is deducted (not NI). This means that her salary is reduced to £44,000 before calculating her income tax liability.

Assuming her tax code allows for a personal allowance of £10,000 this will mean you can claim higher rate tax relief on around £2,315 of contributions into the AVC or other registered pension scheme.

greenglide

Assuming her tax code allows for a personal allowance of £10,000 this will mean you can claim higher rate tax relief on around £2,315 of contributions into the AVC or other registered pension scheme.

If the AVCs are also paid for out of gross pay (like the TPS contributions) they will already be getting HRT relief as will the normal TPS contributions.

Does the L&G account show basic rate tax relief? If so the contributions are out of net pay and HRT relief will need claiming.

TH1878

greenglide wrote: »

If the AVCs are also paid for out of gross pay (like the TPS contributions) they will already be getting HRT relief as will the normal TPS contributions.

Does the L&G account show basic rate tax relief? If so the contributions are out of net pay and HRT relief will need claiming.

True but, without knowing for certain, this sounds like an FSAVC and not the AVC that Prudential usually runs alongside the Teachers Pension Scheme, so unlikely to be deducted via the net pay method. I'm sure the OP can confirm.

Backbiter

hyubh wrote: »

When did she join the TPS? Given her age, if it was before 2007 (and there's been no break) then surely she will stay in the final salary scheme with a protected NPA of 60 (assuming by 'retirement age' you meant her normal pension age in the TPS):

https://www.teacherspensions.co.uk/faqs/public-faqs/scheme-membership/what-is-my-normal-pension-age.aspx

https://www.teacherspensions.co.uk/reform/members/at-a-glance.aspx

Looking at those, she missed out on the 1.4.2012 cut-off date by about a year, so she is a 'tapered member', not a 'protected member'. But, having joined the TPS in 1985, her NPA therefore remains 60, not 65 as she's been informed. Confusing.

Backbiter

TH1878 wrote: »

True but, without knowing for certain, this sounds like an FSAVC and not the AVC that Prudential usually runs alongside the Teachers Pension Scheme, so unlikely to be deducted via the net pay method. I'm sure the OP can confirm.

These aren't deducted via net pay, as they aren't with the Pru.

Based on what you said above about her having around £2300 available for HRT relief, would it be a sensible use of her money to pay around £200 a month as AVCs for the next 8/9 years?
My instinct is that it would yield far more than an ISA over the same period, given the tax advantages. Even if she were to get just Basic rate relief, it would seem a sound plan.
Wherever we have looked for help on this, no one seems to be advocating it very strongly. Are we miscalculating?

cte1111

Backbiter wrote: »

These aren't deducted via net pay, as they aren't with the Pru.

Based on what you said above about her having around £2300 available for HRT relief, would it be a sensible use of her money to pay around £200 a month as AVCs for the next 8/9 years?
My instinct is that it would yield far more than an ISA over the same period, given the tax advantages. Even if she were to get just Basic rate relief, it would seem a sound plan.
Wherever we have looked for help on this, no one seems to be advocating it very strongly. Are we miscalculating?

This is what we are doing currently for my husband, who is in a similar position. Once you take off his final salary pension contributions, he is just in the 40% tax band, so we've set up a separate stakeholder pension, which he is now contributing to each month, sufficient to bring his net income down to the amount allowed with the personal allowance and 20% band.

I'm also continuing to contribute to a private pension, I'm currently self-employed but want to be sure that I have some income of my own too in retirement.

Also make sure that your wife keeps track of any gift aid donations that she gives throughout the year, as this is another simple way to effectively increase her basic rate band by the amount donated. This can be entered in her tax return to bring down the total tax owing, if any.

cte1111

NB if aiming to contribute £2300 in a year, the net contribution each month would be £153.33, as this will then be grossed up to £191.67, which is a twelfth of £2300. Effectively 20% will be claimed back by the pension company, the other 20% will come when doing a tax return for the year.