Severance payment and AVCs

mjp89

Hi all,


Looking for a bit of advice. I have accepted voluntary severence from my current job which includes pay in lieu of notice (PILON). This is a significant amount and means that my income since April will already be well over the 40% tax threshold.


I'm starting a new role in a couple of weeks. The salary is just below the 40% threshold but obviously everything I earn until next April will be taxed at 40% due to the PILON payment. To give some shelter from this I'm planning to make some pension AVCs and have 2 key questions:

1) Where to pay into
My options are existing corporate pension (.4% management charge, limited fund choice), pension for new job (Universities superannuation scheme) or a new SIPP. I'm inclined towards the latter for flexibility but anything I should be considering


2) Amount to pay in
I'm 30 years old and looking to buy a first home in the next 12 months. I already have enough for a 20% deposit saved and instinctively that's the max I'd invest with the rest covered on mortgage. As such it feels like I ought to make a fairly significant AVC to benefit from the tax relief?


I know there's a lot of expertise in these forums so grateful for any thoughts or suggestions for things I may not have considered

Marcon

It's easy to put far too much emphasis on tax relief to the exclusion of everything else. A lower mortgage means lower repayments - have you checked how much lower?

On the other hand, pension contributions made at such a young age will have plenty of time to build up, so could give a much better return. If you're sure you can afford to tie up the cash until at least age 55+, then making a hefty contribution in to a personal pension means the pension provider adds basic rate tax relief and you can claim back higher rate relief through your tax return or by contacting HMRC direct. Remember you can only claim back higher rate relief to the extent you've actually paid it in the first place, so you won't necessarily get higher rate relief on your total pension contribution.

mjp89

Many thanks for your response!


On the mortgage front after a bit of a review I think my partner and I could comfortably afford a 25% deposit. I haven't got specific quotes but general research suggests that reductions in rate are fairly insignificnat beyond that.

Marcon wrote: »

It's easy to put far too much emphasis on tax relief to the exclusion of everything else. A lower mortgage means lower repayments - have you checked how much lower?

On the other hand, pension contributions made at such a young age will have plenty of time to build up, so could give a much better return. If you're sure you can afford to tie up the cash until at least age 55+, then making a hefty contribution in to a personal pension means the pension provider adds basic rate tax relief and you can claim back higher rate relief through your tax return or by contacting HMRC direct. Remember you can only claim back higher rate relief to the extent you've actually paid it in the first place, so you won't necessarily get higher rate relief on your total pension contribution.