Claiming AVCs and tax

lakelady

I hope this is the right place to ask this (please say if it’s not appropriate), and I totally get that any answer isn’t advice; but I have a pension/tax query that might have a quick answer.

I have been living on savings for 2 years, as I left work before my occupational pension was due; but it is about to kick in now. I have a small pension, and some AVCs that I want to cash in, as they won’t buy much of an annuity (about £18500), and I don’t know whether to cash them now, or wait until the new tax year starts in April.

This tax year I have earned very little (about £3k), and as of next week I will have an occupational pension which is just above the 20% tax threshold - £12.300, payable monthly in arrears.

The problem is that I have also just got a pension lump sum of £37k, which, if it counts for tax, would, together with the AVCs, push me into the 40% bracket for this year. I already have that, so it can’t be deferred. It was described as tax-free by the Teachers Pension Agency, so I don’t know if it will make any difference to the AVC money.

I have called the Inland Revenue people, and they didn’t seem to know, and just kept saying that it depended on other factors.

So, my question is - Do I wait until April to claim the AVC money (and presumably pay tax at 20% on 75% of it), or do I claim it now, and if so, would I be taxed at 40%, or, because of my very limited earnings (which won’t increase before April) only be taxed at 20% of the amount above the basic threshold?

Thanks in advance if you can help.

Marcon

lakelady wrote: »

The problem is that I have also just got a pension lump sum of £37k, which, if it counts for tax, would, together with the AVCs, push me into the 40% bracket for this year. I already have that, so it can’t be deferred. It was described as tax-free by the Teachers Pension Agency, so I don’t know if it will make any difference to the AVC money. Tax free is just that: tax free. It will make no difference to your AVC money, which is - if I understand your question correctly - held in a different pension scheme?

I have called the Inland Revenue people, and they didn’t seem to know, and just kept saying that it depended on other factors. Any chance you could press them to explain what 'other factors' they have in mind....?

So, my question is - Do I wait until April to claim the AVC money (and presumably pay tax at 20% on 75% of it), or do I claim it now, and if so, would I be taxed at 40% No, or, because of my very limited earnings (which won’t increase before April) only be taxed at 20% of the amount above the basic threshold?YesHave you spoken to the pension scheme where your AVC funds are held to check exactly what your options are under that scheme?

Please see above. A call to TPAS (free, impartial help) might also be useful if you are still unsure: https://www.pensionsadvisoryservice.org.uk

Paul_Herring

The problem is that I have also just got a pension lump sum of £37k, which, if it counts for tax

If this is a Pension Commencement Lump Sum (PCLS, colloquially TFLS; tax free lump sum) then it won't count for income tax, so won't:

push me into the 40% bracket for this year

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It was described as tax-free by the Teachers Pension Agency, so I don’t know if it will make any difference to the AVC money.

Sounds like PCLS, but sounds like you either need confirmation of that, or to learn more about the concept yourself.

I have called the Inland Revenue people, and they didn’t seem to know, and just kept saying that it depended on other factors.

Well, they aren't lying.. especially if you gave them as much information about it as you have here

So, my question is - Do I wait until April to claim the AVC money (and presumably pay tax at 20% on 75% of it), or do I claim it now, and if so, would I be taxed at 40%, or, because of my very limited earnings (which won’t increase before April) only be taxed at 20% of the amount above the basic threshold?

It looks like you won't be on 40%, and have/will only had £3k+£1k x 4** = £7k 'taxable' income this year - could you break the AVC's into two groups over this and next tax year?

You'd have roughly £4K left of your personal allowance this year to use up (so cash in £5k's worth of AVC to take account of the PCLS from them,)


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** Based on the assumption that

and as of next week I will have an occupational pension which is just above the 20% tax threshold - £12.300, payable monthly in arrears

that £12k being per annum, not per month

lakelady

Thanks, both of you. That helps a lot.

I did try to press HMRC to explain 'other factors'; but the person I spoke to kept reiterating that she couldn't give advice, and that every case was different, which, (whilst I understand the reasons) really didn't help at all. There are no other factors - I haven't had a salary for 2 years, and have no other income; but if there had been I could have answered any questions, plus she had called up my details so could see for herself.

Yes, the lump sum will be a PCLS, as I have a final salary pension, which doesn't have a 'pot' from which to draw 25%.

Sadly you are right, and the £12300 is annual, not monthly .

So, to clarify - if I cash in the AVCs (with the Prudential, not the TPS) I will have that money (£18.5k) plus the £3k I earned, plus 3 months of my pension and be taxed on the sum of that at 20%, after the tax-tree allowance is deducted?

I will call the pension advisory service to check, and hope that they are more forthcoming than HMRC.

Thanks again for your help - Happy New Year!

Sun-Is-Fun

You should be able to take 25% of the Pru AVC tax free (approx £4625 out of your £18,500)

If you've earned about 3000 this tax year and your teachers pension kicks in next week, giving you about £3075 this tax year (£3000+£3075=£6075), meaning you could draw approx £5775 from your Pru AVC this tax year without paying any tax on it. £11,850 (tax free allowance) - £6075= £5775.

I don't know how old you are but you could have drawn the pru avc when you you were 55 up to the tax threshold each year without paying tax, so you could have avoided paying any tax at all and not using as much savings. If you are only 55 now, then disregard this paragraph !

Your remaining amount in your avc, when you withdraw it next tax year or later, will be taxed as your teacher's pension will be over the tax threshold for next year (which will be £12,500) as it will increase 2.4% in April due to CPI (£12,300 x 2.4% = £12, 595.20).

Hope this helps.

xylophone

Have you obtained a new state pension statement?

https://www.gov.uk/check-state-pension

If your statement shows an amount below full new state pension you may wish to consider voluntary contributions.

See https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/topping-up-your-state-pension-guide.pdf


https://www.pru.co.uk/pdf/TAVK0789.pdf

Your lump sum from your TPS is tax free.

Your monthly pension is taxable in this tax year but it would seem that you are below your tax free allowance.

It appears that the Pru offers drawdown.

You will be able to access a 25% PCLS from the AVC and then draw down as much as best suits your tax position in this tax year.

zagubov

Your tax-free lump sum doesn't exist as far as HMRC are concerned. If you take a tax-free lump sum from your AVC I'm not sure that exists either. If you take more from your AVC then it may well lead to tax being paid.

Like HMRC we can't be trusted to give advice, so maybe one idea might be to contact the pru or the TPAS.

Be careful to ask precise yes-or-no questions.
"If I take the AVC lump sum is it taxable this year" type of thing.

Don't waste your time with questions like
"would I be better off doing..." or "how much would I get if I ...." as they won't be easily answerable, if at all.