Can’t take AVC until taking DB Pension?

Duggo

zagfles said:

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.

I think this was the question I was trying to ask the administrator but didn’t know how to word it.

Duggo

Sorry to ask,  it where does the 6.67 come into it?   The AVC is roughly £22k, and the annual DB is about £25k, if that helps.   

zagfles

Duggo said:

Sorry to ask,  it where does the 6.67 come into it?   The AVC is roughly £22k, and the annual DB is about £25k, if that helps.   

You can take 25% of the pension value tax free. Pension value is 20 times the annual pension plus the AVC.

Works out to AVC = 6.6667 times the annual pension.

If you want the algebra:

Total pension value T = AVC A + 20 * Annual pension P

Max A = T/4, ie T=4A

So for max A  4A = A + 20P

So 3A = 20P

A=20/3 P ie 6.6667P

cloud_dog

I didn't think DB schemes PCLS calculations worked that way?  If it does, then the calculation does not work for me, no matter what values I throw at it.

As far as I am aware the first formula will calculate the LTA value.

AlanP_2

cloud_dog said:

I didn't think DB schemes PCLS calculations worked that way?  If it does, then the calculation does not work for me, no matter what values I throw at it.

As far as I am aware the first formula will calculate the LTA value.

That is how the maximum AVC /TFLS is worked out for the LGPS.

((Annual Pension * 20) + Lump Sum)/4 where Lump Sum is any combination of statutory lump sum & AVC.

Commutation calculations and / or GMP etc will no doubt make this more complicated but keeping it simple, and as a quick way of working out how much to target as an AVC pot it works.

So to maximse taking the AVC as the tax free element you can use zagfles' formula.

For example with an Annual Pension of £3,750 the maximum AVC / TFLS would be £25,000 which is 6.667 * 3750 as shown by ((20 * 3750) + 25,000)/4 = £25,000.

Annual Pension of £25,000 you get a maximum AVC / TFLS of £166,675 as shown by (20 * 25000) + 166,675)/4 = £166,675.


NOTE : All figures out by a few quid as it should be 6.666 recurring not 6.667

cloud_dog

Ok, cheers.

zagfles

cloud_dog said:

I didn't think DB schemes PCLS calculations worked that way?  If it does, then the calculation does not work for me, no matter what values I throw at it.

As far as I am aware the first formula will calculate the LTA value.

It is for max AVC PCLS, it's more complicated when commuting DB benefits for PCLS.