Can’t take AVC until taking DB Pension?

Duggo

Is it normal for an AVC to be inaccessible until taking a final salary pension?  We put some redundancy in an ACV but can’t access it for 7 years when MrD takes the final salary pension.  I can’t quite see the tax advantage now of using the AVC unless I’m missing something obvious.

Marcon

Depends on the rules of the particular pension scheme. Some permit access to AVCs and main scheme pension at different ages, others don't - and it sounds as if your husband's comes into the latter category.

The tax advantage came at the time the contribution to the AVC fund was made.

Duggo

Thanks Marcon.  I appreciate that he saved 20% tax when he put the payment in, but as he can’t withdraw it until his pension is in place, I’m guessing he’ll be taxed 20% on it....?  We are checking the scheme rules but the advisor we spoke to yesterday thought this was the rule, but they are going to write to us.

xylophone

There should be a guide to the AVC and how it aligns with the main scheme.
Example
https://www.iow.gov.uk/azservices/documents/1468-Additional-Voluntary-Contributions-AVCskey-features.pdf

Is there the option of transferring the AVC to another provider if he wishes to take it before main scheme benefits?

Duggo

We have asked about transferring it. 

dunstonh

Is it normal for an AVC to be inaccessible until taking a final salary pension?

If you are still an active member of the DB scheme then yes.  If you cease to be an active member then no with most but not all.    Usually, the ones that link to the main scheme for payment of benefits (e.g. the lump sum taken from the AVC instead of the main scheme) are the ones that dont allow access at a different time.

All AVCs were linked to the main scheme until a rule change in 2006 that allowed the link to be broken but only if the scheme wanted to.  Most schemes have updated over the years to match that but not all.

 I appreciate that he saved 20% tax when he put the payment in, but as he can’t withdraw it until his pension is in place, I’m guessing he’ll be taxed 20% on it....? 

Drawing it will be 15% equivalent not 20% due a quarter of it being tax free.
Are we to assume he chose an AVC rather than using an individual plan as there was salary sacrifice involved?  That would have saved NI as well as tax.

Duggo

There wasnt any salary sacrifice. I’m not sure we could put it in an individual plan, or if it was an option.
I’m hoping they come back to us with an option to transfer out, as this would be the most tax efficient way.   

If you don’t take a lump sum from a DB scheme, is the AVC still only 25% tax free?

cloud_dog

Who is the scheme with?

I went through a similar process but for me the whole purpose of using the AVCs under a SS arrangement was to allow me to benefit from the tax/NI savings and then to be able to draw it earlier than the DB NRA.  I ensured that I would be allowed to undertake a transfer out from the AVC scheme in to my SIPP prior to contributing.  It took a long while for the trustee's to confirm to the administrators that this was acceptable.  Firstly, I obtained confirmation that my AVC scheme did not have any DB style benefits associated with it, i.e. it is a DC pot of money.  Secondly, I obtained confirmation that partial transfers out are allowed by the scheme.  I was helped with the second bit with some wording in the pension handbook:

4. Do the Trustees charge the member for Transfer Values?

The Scheme is a defined benefit arrangement and Members are allowed one free Transfer Value of their Scheme entitlement in any 12 month period. There is a charge of £300 for any subsequent requested Transfer Value(s). If you have paid Additional Voluntary Contributions (AVCs) then you do have the option to transfer out only your AVCs, leaving your defined benefits within the Scheme; this is termed a partial transfer and if interested in this option you should contact the administrator who can provide you with a current value of your AVCs and further information.

Since that time I have been able to undertake two partial transfers out, and the reason for doing this the first time was simply to prove that what I had been told / confirmed was in fact correct. 

tigerspill

This is exactly the way my pension was.
The AVC was "linked" to the main pension in this way.
The big advantage was that when taken together, I was able to treat my AVCs as part of the pension lump sum.  And the tax free lump sum was 25% of the TOTAL pension value - 20 x Pension plus normal lump sum plus AVC.
The other big advantage was our AVCs were done through salary sacrifice and hence saved NI as well as income tax.
I believe there was one option to take independently and that was to purchase a third party annuity product.

zagfles

Yes, be careful, where AVCs are linked to the main DB scheme you usually have to right to take the entire AVC as tax free cash provided it's less than 25% of the total value, ie 6.67 times the DB annual pension.

If you transfer the AVC out you'd only get 25% of it tax free. You'd also likely be able to commute the DB pension for tax free cash but commutation rates are often rubbish with DB schemes (eg trade £1000pa pension for £10,000 tax free lump sum).

So leaving them together and taking the AVC as tax free cash when the DB pension is put into payment can be a very tax efficient option.

Duggo

Thanks everyone. I’ve already asked about transferring out, and I think I poorly worded a question on taking the AVC tax free if it was less than the total of the DB pension.   I’ll wait on their reply.