AVC for early retirement - teachers pension

Cheshiregrin

I am a teacher payiny into the teachers pension. I am thinking of starting AVC’s. I am planning on retiring at age 60 in August 2022, 3 years from now. I am a transition member with NPA of 65 for Final salary and NPA of 68 for Average salary. I have savings of £65,000 but recently read on this forum about AVC’s as a good way to use tax relief. I plan to use AVC’s to live on for the 5 year gap from 60 to 65 so that I only start my final salary pension at my NPA.

I have 15 years and 54 days teachers’ pension so far. I currently earn £38,500 per year (20% tax bracket) and I want to pay into AVC’s the most that I can without incurring any extra tax, (i.e. take advantage of the tax relief). I have tried to calculate how much I can pay in per year as AVC from my pay and I have come up with the figure of £15,960. Does anyone know if I have calculated this correctly?

Dazed_and_confused

Perhaps you could explain how you have arrived at £15,960?

And what basis are the AVC contributions being paid?

Lump sum with no automatic tax relief?

Net pay?

Relief at source?

chucknorris

Only under threat of death, would I invest in AVC's in the TPS, I have however already bought the max allowed of additional pension in the pre 2015 scheme. Next year I will again be able to buy additional pension in the post 2015 scheme, in which I will invest as much as I can. But you can keep the AVC's, I have zero interest, I invest the excess into my SIPP.

Have you already invested the max allowed in additional pension? If not, why on earth are you preferring AVC's over additional pension?

Triumph13

I can't comment on whether buying additional pension then taking the actuarial reduction for taking all your pension early stacks up - you'd need to work through the numbers.
For your stated aim of leaving the TPS until 65 and using 'savings' of some kind to bridge the gap from 60 AVCs would make probably make no sense unless your employer offered salary sacrifice.
Generally, unless your employer is in some way matching them, there are 3 reasons you might prefer AVCs to a stand alone private pension / SIPP:

1. The ability to leverage the DB part to take the AVCs tax free - but that only works if you take them at the same time
2. Salary sacrifice that lets you save NI
3. Lower costs if the employer picks up all the admin costs

Otherwise you'll find life much easier if you just use your savings to put all your salary into a stand alone pension that you can draw down 60 to 65 without having to muck about transferring it about first.

Cheshiregrin

Thanks everyone for your thoughts.
My reason for the AVC's is that I want to live on them between 60 and 65 when my pension kicks in. I thought about the additional teachers pension but I would be penalized for taking it early which I would have to do to live off of it between 60 and 65, but I wont be penalized for taking the AVC's from 60.

I get to the £15,960 as follows:
Annual salary £38,500 less tax free pay of £12,500 = £26,000.
Less the pension contributions that will be going towards my TP automatically through payrol. My 9.6% contributions = £3,696 and my employers contributions 16.48% = £6,344, totaling £10,040.
So £26,000 less £10,040 = £15,960.

If I put this £15,960 into AVC's through payroll for this tax year, will it all be tax free due to the tax relief? Or do I need to put in 20% less to take into account the tax relief? If I do this for the next three years until I have used up most of my £65,000 savings, would this be the most effective way to get tax relief for my savings?
I was thinking of drawing the £12,500 each year from the AVC's to live on from Age 60, to ensure full tax relief as it will be classed as earnings.
Does this help you to understand my situation? I'm happy to answer any more questions.
Thanks in advance.

chucknorris

Cheshiregrin wrote: »

Thanks everyone for your thoughts.
My reason for the AVC's is that I want to live on them between 60 and 65 when my pension kicks in. I thought about the additional teachers pension but I would be penalized for taking it early which I would have to do to live off of it between 60 and 65, but I wont be penalized for taking the AVC's from 60.

I get to the £15,960 as follows:
Annual salary £38,500 less tax free pay of £12,500 = £26,000.
Less the pension contributions that will be going towards my TP automatically through payrol. My 9.6% contributions = £3,696 and my employers contributions 16.48% = £6,344, totaling £10,040.
So £26,000 less £10,040 = £15,960.

If I put this £15,960 into AVC's through payroll for this tax year, will it all be tax free due to the tax relief? Or do I need to put in 20% less to take into account the tax relief? If I do this for the next three years until I have used up most of my £65,000 savings, would this be the most effective way to get tax relief for my savings?
I was thinking of drawing the £12,500 each year from the AVC's to live on from Age 60, to ensure full tax relief as it will be classed as earnings.
Does this help you to understand my situation? I'm happy to answer any more questions.
Thanks in advance.

If you are going to start drawing down your AVC's in only just over 3 years time, you should select a low risk fund, unless you are happy to take on the risk of a significant capital loss. Lower risk options will have lower return expectations, are you confident that these will outperform the actuarial adjusted TPS additional pension?

I don't know what lower risk options the prudential offers, but be careful, I think traditionally lower risk bond funds, are quite risky to interest rate rises over the next few years. Which is why I have avoided bond funds, and only invested in individual corporate bonds. To get a decent return I have invested in slightly and moderately higher risk bonds, but I am more comfortable taking on that risk, than taking on the risk of interest rate rises adversely affecting bond funds.

hugheskevi

I get to the £15,960 as follows:
Annual salary £38,500 less tax free pay of £12,500 = £26,000.
Less the pension contributions that will be going towards my TP automatically through payrol. My 9.6% contributions = £3,696 and my employers contributions 16.48% = £6,344, totaling £10,040.
So £26,000 less £10,040 = £15,960.

You should not be including employer contributions in the calculation, so the result is £22,304. This applies for a net pay arrangement for the contributions.

However, if you used a relief at source arrangement you could contribute £34,804 and get tax relief on all of the contribution.

If I put this £15,960 into AVC's through payroll for this tax year, will it all be tax free due to the tax relief?

Assuming the contributions are through net pay, yes. Check with your employer whether they use net pay or relief at source for AVC contributions.

Or do I need to put in 20% less to take into account the tax relief?

This would apply if the contributions are made via relief at source, an alternative contribution method to net pay.

I was thinking of drawing the £12,500 each year from the AVC's to live on from Age 60, to ensure full tax relief as it will be classed as earnings.

It would not be classed as earnings, it is a pension payment. So no National Insurance contributions due as well as some other differences.

Remember to take into account the tax free lump sum. You can draw £16,667 each year with Uncrystallised Funds Pension Lump Sum withdrawal, with 25% being tax free and the remaining 75% using up your Personal Allowance.

Check what withdrawal methods the AVC offers.

Cheshiregrin

Thanks everyone, for taking the time to reply. There is new information here that I need to take into consideration before I make any decisions.

Corto

Gov.uk says that you have to add up all contributions, your own, your tax relief and the employer contributions to calculate your annual allowance. This comment seems to suggest differently?

hugheskevi

Gov.uk says that you have to add up all contributions, your own, your tax relief and the employer contributions to calculate your annual allowance. This comment seems to suggest differently?

The above is for a Defined Contribution pension scheme (and is to calculate the Pension Input - the Annual Allowance is the amount you can contribute and receive tax relief).

For a Defined Benefit scheme, it is the increase in the value of benefits you have to measure, which is the Pension Input amount provided by the scheme either automatically if Pension Input exceeds £40,000 or on request.

nigelbb

hugheskevi wrote: »

The above is for a Defined Contribution pension scheme (and is to calculate the Pension Input - the Annual Allowance is the amount you can contribute and receive tax relief).

For a Defined Benefit scheme, it is the increase in the value of benefits you have to measure, which is the Pension Input amount provided by the scheme either automatically if Pension Input exceeds £40,000 or on request.

Correct. As a rough rule of thumb it's the difference between what your pension was worth a year ago versus what it's worth today multiplied by sixteen.Even more simply it's how much pension was earned in the year multiplied by sixteen. In the OP's case if they were in the NHS pension scheme accumulating at 1/54 this would be (£38.5K /54) x 16 = £11407.