LGPS and Prudential AVC Stupidity Check

John905

After receiving a lot of invaluable feedback and having spent a good while researching on this forum I have now formulated a plan and thought I’d better double check to make sure I’m not doing anything stupid. Background is I am about to turn 54 and have been in the Strathclyde LGPS since 1993. I will meet the rule of 85 in Oct 2022. My current salary is just a touch over £37,000 and I don’t see this increasing in real terms. My hope is to retire at 60, or maybe even a touch earlier. My strategy is to put as much as possible into a Prudential AVC between now and finishing up, to take advantage of the hefty tax free lump sum. By my calculations I could aim for a maximum tax free AVC lump of about £105,000. This is based on 20x my estimated pension at 60 of £14,800 (£296,000) plus my LGPS lump sum (£19,700) plus my AVC pot (£105,000) x 0.25. Luckily, I have an old endowment from a previous mortgage that will mature soon, so I was thinking I should feed this into my AVC as quickly as possible in case of any future rule changes.

I currently pay £326.95 income tax every 4 weeks. Am I right in thinking that as a basic rate tax payer the maximum I could pay into an AVC without losing the benefits of tax relief would be 5 times this amount? Are there any other factors I should take into consideration (pension contributions, NI etc)?

With regard to fund choice, Prudential AVC’s offer 6 options that are classed as lower to medium risk plus the Prudential Cash Fund, which is classed as minimal risk. My goal with the funds would be to take a cautious approach and essentially mitigate against the effects of inflation and hopefully add a little extra value prior to taking the lump sum in June 2025.

1. Prudential All Stocks Corporate Bond Fund
2. Prudential Dynamic Growth 1
3. Prudential Dynamic Growth 2
4. Prudential Dynamic Growth 3
5. Prudential Fixed Interest Fund
6. Prudential With-Profits Fund
7. Prudential Cash Fund

My plan is to reduce risk by spreading my contributions as 4 lots of 25% across options 1,2,5 and 6. I had read somewhere that the With-Profits Fund could potentially lead to delays with payment of the lump sum. Is this something I should be careful of? Could MVR issues for the With-Profits fund also be something that might steer me in a slightly different direction?

I was also thinking that if I was lucky enough to be able to engineer a position whereby I could afford to leave after I met the rule of 85 in Oct 22, it would make sense to leave, but live off the land so to speak, until taking my pension benefits when I turn 60. Yet another option could also be to take flexible retirement, if my employer can be persuaded, at some stage before I turn 60.

[FONT=&quot]Am I missing anything obvious here or doing anything daft?[/FONT]

Brynsam

John905 wrote: »

I currently pay £326.95 income tax every 4 weeks. Am I right in thinking that as a basic rate tax payer the maximum I could pay into an AVC without losing the benefits of tax relief would be 5 times this amount? Are there any other factors I should take into consideration (pension contributions, NI etc)?
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Being a basic rate taxpayer has nothing to do with how much you can contribute to your Pru AVC. In theory you can contribute up to 100% of your earned income (or £40K, whichever is the lower) to a pension scheme and get tax relief at your marginal rate. In practice you usually can't, for several reasons: you need to pay NI from your salary, which reduces the amount available for investment into a pension; and you need to factor in tax relief at source (which is how you get tax relief on your Pru AVCs).

xylophone

and you need to factor in tax relief at source (which is how you get tax relief on your Pru AVCs).

LGPS/Pru AVC uses ''net pay" for tax relief.

https://www.lgpsmember.org/arm/already-member-extra.php

Additional Voluntary Contributions (AVCs)

When you save AVCs you build up a pot of money which is then used to provide additional benefits to your LGPS benefits. All local government pension funds have an arrangement with an AVC provider (often an insurance company or building society) in which you can invest money. The money is deducted directly from your pay before your tax is worked out, so, if you pay tax you receive tax relief automatically. You have your own personal account and you decide how the money in your pot is to be invested.

You can pay up to 100% of your pensionable pay into an in-house AVC.


Presumably the OP will seek to increase his AVC from salary , using the proceeds of the insurance policy as "salary replacement" for the money contributed to his pension.

He will be making standard pension contributions to the scheme on the "net pay" basis.

https://www.lgpsmember.org/more/contscalc.php

sandsy

Brynsam wrote: »

Being a basic rate taxpayer has nothing to do with how much you can contribute to your Pru AVC. In theory you can contribute up to 100% of your earned income (or £40K, whichever is the lower) to a pension scheme and get tax relief at your marginal rate. In practice you usually can't, for several reasons: you need to pay NI from your salary, which reduces the amount available for investment into a pension; and you need to factor in tax relief at source (which is how you get tax relief on your Pru AVCs).

A further complicating factor on how much you can contribute to your AVC is that with a defined benefit scheme, the amount you actually contribute in any tax year is irrelevant. What matters is the value of benefits accrued over the period.

So you must make sure that the AVC contribution plus the value of benefits accrued each year in the main scheme is the lesser of income and £40k.

xylophone

https://www.lgpsmember.org/more/aa-quick-check-tool.php