Taxable or not?

HouseMouse

I'm confused....

I have a DB scheme and a small amount of AVCs which I can now access.
I understand that if I take the AVCs in cash now, then I get 25% tax-free and pay tax on the other 75%. This will push me over my personal allowance so I'll not be able to claim it all back. This scheme doesn't have an option to take some cash now & leave the rest for another tax year - it's all or nothing. It's a small amount, about £7K, so it's not worth trying to get an annuity (I'm 64)

I also have the option to take a lump sum out of my DB pot, and I can add the AVC total to this. I've been told if I do this, the whole sum is tax free.

I don't want to give up any of my pension (it's not very large to start with) but neither do I want to pay any income tax if I can avoid it.

It seems to me that I could take say £12 out of my DB pot and add the AVC amount to this, then ALL of the amount is tax-free. Can anyone confirm this is the case? Is there a catch?

jamesd

Also not worth trying to get an annuity because deferring your state pension is likely to pay you more - 5.8% increase per year of deferral - than an annuity if your life expectancy is close to normal.

What is the expected income from the DB pension and the transfer value for it? Do you have a spouse or civil partner and what death benefits does it provide for them? When did or do they reach their state pension age?

I'm wondering whether you might get a higher guaranteed income by transferring and deferring your state pension.

HouseMouse

If I can get the £7K AVCs without paying any tax then yes it would be worthwhile to defer my state pension for a short while, but that is not the reason I'm asking. I just object in principle to the idea of paying income tax at all if there is an easy way round it.

greenglide

Normally if you are allowed to use the AVCs to fund a tax free lump sum (which you have suggested you can) you can specify the amount to use. Usually this will have the option of using all of the AVC but none of the main pension. This would appear to be what you want to achieve. I see no reason for the scheme to specify that you must take out part of the main scheme as well. I suggest that you read the scheme rules again and post here if not clear.

The alternative is to transfer the AVC to another pension scheme and take the money out in more than one tax year.

HouseMouse

greenglide, I have already asked the pension fund administrators about taking the AVCs in cash, and they told me that 75% will be taxable.
I do have the option to transfer it to another provider that will let me take it in smaller amounts over 2 or more tax years. I have reservations about whether I will lose more in admin fees if I do this. As I asked in my original post, I wondered if it is possible to get the AVCs out entirely tax-free by cashing in a very small amount from my main pension. This seems so easy I'm sure there must be a catch.

xylophone

I don't want to give up any of my pension

I don't quite understand this - your scheme offers the option of a monthly pension at retirement with the possibility of commutation?

Under HMRC rules, people who make AVCs on top of their defined benefit pension can take their lump sum from their AVCs pot and leave their final salary pension untouched, provided it does not exceed 25 per cent of the entire pension fund.

Take the AVCs as the PCLS?

HouseMouse

xylophone wrote: »

I don't quite understand this - your scheme offers the option of a monthly pension at retirement with the possibility of commutation?

Under HMRC rules, people who make AVCs on top of their defined benefit pension can take their lump sum from their AVCs pot and leave their final salary pension untouched, provided it does not exceed 25 per cent of the entire pension fund.

Take the AVCs as the PCLS?

Correct: I can take the full amount of AVCs as cash without touching my main pension pot, but I HAVE BEEN TOLD that 75% of this will be taxable. However, any cash I take from my main pension isn't taxable. If I take cash from my main pension then the AVC amount will be added to it (unless I transfer it to another pension provider).

I am beginning to think that the advisor I spoke to has been misinformed about the tax position so I will enquire again.

Linton

HouseMouse wrote: »

Correct: I can take the full amount of AVCs as cash without touching my main pension pot, but I HAVE BEEN TOLD that 75% of this will be taxable. However, any cash I take from my main pension isn't taxable. If I take cash from my main pension then the AVC amount will be added to it (unless I transfer it to another pension provider).

I am beginning to think that the advisor I spoke to has been misinformed about the tax position so I will enquire again.

You dont seem to have understood and/or have asked the wrong question. What may be possible when you take the main DB pension is for the tax free lump sum component of the DB pension to be taken out of the AVC leaving you with a higher DB pension and so you could effectively take all of the AVC tax free.

jamesd

HouseMouse wrote: »

If I can get the £7K AVCs without paying any tax then yes it would be worthwhile to defer my state pension for a short while, but that is not the reason I'm asking. I just object in principle to the idea of paying income tax at all if there is an easy way round it.

The easiest way around it would be the transfer out of the whole pension, not just the AVC.