AVC or Savings??

AlanP_2

Pipkin1812 said:

Thanks everyone. Given the potential charges on such products and given the relatively short timescale would I be better putting more in to my existing AVC?  I am not clear on the option of buying additional years through an AVC?

That really depends on whether you are happy to / can afford to take an a reduced pension at 60 or whether you would rather have funds outside the LGPS that you can live off and delay taking the LGPS benefits.

Will the LGPS Age 60 pension + the Tax Free AVC pot be enough for you (with State Pension to follow 6/7 years later)?

If you don't use all your AVC pot as the Tax Free Lump Sum you have the option of "buying" additional annual LGPS pension with it. As Silvertabby said the rates are better than you would get for using a similar sized pot to purchase an Annuityu on the open market. 

dunstonh

Thanks everyone. Given the potential charges on such products and given the relatively short timescale would I be better putting more in to my existing AVC? 

The AVC has charges.  Probably higher than individual pensions.    Savings accounts have charges, even though you cannot see them.   So, charges are not a reason.

Your objective should be the primary driver and going with the best option for that objective.

saucer

Silvertabby said:

Only your pre 2008 service is covered by R85 protections, so if you retire at 60 your 2008 to 2014 benefits will be reduced by 22% for early payment and your 2014 to date of leaving will be reduced by the factor for 6 or 7 years (SPA).

Most people who take out LGPS in house AVCs do so with the intention of maximising their tax free cash, but this money can also be used to 'buy' additional index linked LGPS benefits at a much more generous rate than anything offered on the open market.

Would another option - that of saving money to live on for a couple of years or so, thus lessening the early payment 'hit' - be possible?

As Silvertabby says one really big advantage of the LGPS AVC is that you can access it entirely tax free (as long as it is less than 25% of the total value of your pension (which it is very likely to be).  

jamesd

It's worth knowing that from age 55 a basic rate tax payer can pay £24,000 net into a personal pension, have that increased to £30,000 by the pension tax relief then take out £7,500 tax free every rolling 12 month period (not tax or calendar year). This £7,500 can be recycled into more pension contributions with more tax relief.

Limits: gross pay (after any salary sacrifice) must be at least as high as after tax relief pension amount. Gross personal contributions plus DB increase in value plus AVC salary sacrifice must be no more than £40,000 annual allowance plus unused annual allowance from previous three years or a tax charge is payable on the excess; some people have a lower allowance. £24,000 isn't the maximum, just what it takes to get the £7,500 maximum ongoing tax free amount.

In addition £10,000 can be taken as all of the money from three pots (can transfer to create them) per human lifetime with 25% tax free and 75% taxable using the small pot rule. Subject to gross pay and annual allowance.

I've assumed that  the lifetime allowance hasn't been and won't be exceeded and that the money purchase annual allowance hasn't been triggered.

While tax authorities consider such recycling generally undesirable, in the immediate pre-retirement years the benefit is proportionally greatest for relatively low earners and trying to direct more tax relief to them is another objective.

The AVCs offer the benefits of saving NI and being all tax free up to 25% of the combined DB and AVC value.

An independent personal pension offers the advantage of being takeable from age 55, so you can take it to live on while you wait longer to take DB and AVC. That will reduce the actuarial reduction and get you a higher DB pension for life. Nothing can be done about not saving NI on the way in but on the way out 25% is tax free and you get an income tax personal allowance of £12,500 a year. Combined that's £16,666 a year that can be taken out with no tax due. For this bridging/delaying purpose that combined with the lower actuarial reduction will usually make this the better choice for low to middle earners.

So, first try to maximise delay to cut the actuarial reduction, then once you've done that, exploit the AVC NI and 100% tax free potential. If you have other savings now is a good time to use them for personal pension contributions to increase their value.

AlanP_2

Not all AVCs offer an NI saving, only those operating under Salary Sacrifice arrangements.

Pipkin1812

jamesd said:

It's worth knowing that from age 55 a basic rate tax payer can pay £24,000 net into a personal pension, have that increased to £30,000 by the pension tax relief then take out £7,500 tax free every rolling 12 month period (not tax or calendar year). This £7,500 can be recycled into more pension contributions with more tax relief.

Limits: gross pay (after any salary sacrifice) must be at least as high as after tax relief pension amount. Gross personal contributions plus DB increase in value plus AVC salary sacrifice must be no more than £40,000 annual allowance plus unused annual allowance from previous three years or a tax charge is payable on the excess; some people have a lower allowance. £24,000 isn't the maximum, just what it takes to get the £7,500 maximum ongoing tax free amount.

In addition £10,000 can be taken as all of the money from three pots (can transfer to create them) per human lifetime with 25% tax free and 75% taxable using the small pot rule. Subject to gross pay and annual allowance.

I've assumed that  the lifetime allowance hasn't been and won't be exceeded and that the money purchase annual allowance hasn't been triggered.

While tax authorities consider such recycling generally undesirable, in the immediate pre-retirement years the benefit is proportionally greatest for relatively low earners and trying to direct more tax relief to them is another objective.

The AVCs offer the benefits of saving NI and being all tax free up to 25% of the combined DB and AVC value.

An independent personal pension offers the advantage of being takeable from age 55, so you can take it to live on while you wait longer to take DB and AVC. That will reduce the actuarial reduction and get you a higher DB pension for life. Nothing can be done about not saving NI on the way in but on the way out 25% is tax free and you get an income tax personal allowance of £12,500 a year. Combined that's £16,666 a year that can be taken out with no tax due. For this bridging/delaying purpose that combined with the lower actuarial reduction will usually make this the better choice for low to middle earners.

So, first try to maximise delay to cut the actuarial reduction, then once you've done that, exploit the AVC NI and 100% tax free potential. If you have other savings now is a good time to use them for personal pension contributions to increase their value.

As I am already 56 and hope to retire at 60 it’s it worth doing a personal pension for such a short period?  Also I’m not sure if I have a protected retirement age of 65, can anyone help?

jamesd

Yes, it's worthwhile. While you plan to retire at 60 that doesn't necessarily mean taking the work pension then. Waiting a bit funded by the personal pension, looks like the way to go. Or you could perhaps retire earlier but still take the work pension at 60.

jamesd

AlanP_2 said:

Not all AVCs offer an NI saving, only those operating under Salary Sacrifice arrangements.

Right. I normally expect them to be gross pay (tax simplification but no NI saving). From the earlier posts we know that this one is salary sacrifice.

Pipkin1812

Thanks all. So if I go down the SIPP route is there somewhere that would recommend maybe the top 5 products?  Also what sort of monthly investment should I be aiming for to cover the 4 year period?  Thanks again. 

Silvertabby

Pipkin1812 said:

jamesd said:

It's worth knowing that from age 55 a basic rate tax payer can pay £24,000 net into a personal pension, have that increased to £30,000 by the pension tax relief then take out £7,500 tax free every rolling 12 month period (not tax or calendar year). This £7,500 can be recycled into more pension contributions with more tax relief.

Limits: gross pay (after any salary sacrifice) must be at least as high as after tax relief pension amount. Gross personal contributions plus DB increase in value plus AVC salary sacrifice must be no more than £40,000 annual allowance plus unused annual allowance from previous three years or a tax charge is payable on the excess; some people have a lower allowance. £24,000 isn't the maximum, just what it takes to get the £7,500 maximum ongoing tax free amount.

In addition £10,000 can be taken as all of the money from three pots (can transfer to create them) per human lifetime with 25% tax free and 75% taxable using the small pot rule. Subject to gross pay and annual allowance.

I've assumed that  the lifetime allowance hasn't been and won't be exceeded and that the money purchase annual allowance hasn't been triggered.

While tax authorities consider such recycling generally undesirable, in the immediate pre-retirement years the benefit is proportionally greatest for relatively low earners and trying to direct more tax relief to them is another objective.

The AVCs offer the benefits of saving NI and being all tax free up to 25% of the combined DB and AVC value.

An independent personal pension offers the advantage of being takeable from age 55, so you can take it to live on while you wait longer to take DB and AVC. That will reduce the actuarial reduction and get you a higher DB pension for life. Nothing can be done about not saving NI on the way in but on the way out 25% is tax free and you get an income tax personal allowance of £12,500 a year. Combined that's £16,666 a year that can be taken out with no tax due. For this bridging/delaying purpose that combined with the lower actuarial reduction will usually make this the better choice for low to middle earners.

So, first try to maximise delay to cut the actuarial reduction, then once you've done that, exploit the AVC NI and 100% tax free potential. If you have other savings now is a good time to use them for personal pension contributions to increase their value.

As I am already 56 and hope to retire at 60 it’s it worth doing a personal pension for such a short period?  Also I’m not sure if I have a protected retirement age of 65, can anyone help?

In your case, LGPS benefits accrued:

Up to 31 March 2008 = age 60
1 April 2008 to 31 March 2014 = age 65
1 April 2014 onwards = SPA