IS THIS POSSIBLE - LGPS PAY IN LIEU AND REDUNDANCY OPTIONS / TAX EFFICIENCY

billywhizz1966

Hi All
My OH is being made redundant from LG on efficiency grounds
She is over 55 and we understand her position on her pension particularly now the £95k issue has been shelved momentarily   
This will mean she is entitled to a redundancy payment  that will be more than £30k which we understand is tax free. 
She currently pays AVC's of £1500 (about 20% of her income) per month. She is likely to be leave in June being paid 3 months in lieu which she will most likely work.
My questions are 

• Can she increase her AVC's to circa 80% for the months April May and June (increasing deductions to some £15k). She already has an AVC pot already built up of circa £25k that she can take tax free when her pension starts (which will now be around July/August). The AVC has to be taken at same time as her LG pension which will be paid early without reduction. Is this allowed as it seems a very tax efficient way of doing things as she can take it all tax free and reduce the tax due 
• Secondly, with her redundancy payment above the £30k. What is the best way of reducing the tax being paid on this if one exists ?

Hope people don't mind me asking and sorry if they are stupid questions but just trying to work out the best way of maximising any position   
Many Thanks


   
 

billywhizz1966

Sorry had to make a minor correction to text

Silvertabby

Yes, she can increase her AVC payments, but it all depends on how quickly she wants her pension lump sum and first pension payment.

Pre Covid, I would recommend that AVC payments should be cancelled at least a month prior to the retirement date.  This would give the AVC provider enough time to confirm final payment details and then disinvest the whole fund.  The final LGPS calculations simply can't be done without confirmation of the disinvested amount.

Now we have Covid and working from home, I would suggest cancelling AVC payments at least 2 - possibly even 3 - months ahead of retirement in order to achieve prompt payment of benefits.

It depends on your wife's priorities.  ie, if the extra tax free cash is the most important thing, and she is happy to wait for 3 months post retirement for payment of her LGPS benefits.

Can't help with the redundancy payment tax question, I'm afraid.

AlanP_2

Why can't the resundance money over £30k go in to a pension as well ? Either higher AVCs so that she effectievly puts "100%" of eligible salary in or a SIPP?

You need to do a bit of Excel work and calculate the optimum value for the AVCs and a SIPP.

Upping the AVCs to the level where she would be on a txabale pay of ~£1050 (monthly personal tax allowance) is optimal. Less than that taxable she would get no tax relief, BUT would be able to offset the tax "not paid" against the taxable portion of the redundancy as tax is asessed over the year.

So for example, April / May /June set AVCs at a level where her taxable pay just covers normal LGPS deductions and NI (so say £600 taxable). By July when redundancy is paid she will have taxable earnings of £1800 but an accrued tax allowance to date of ~£4200 so £2400 of taxable redundancy would be taken out of scope.

Balance, subject to limit of (Gross Salary - Pension Contributions) salary in tax year could be paid in to a SIPP.

Silvertabby

Alan - yes, that would work if OP's wife's priority is maximum tax free cash/ paying as little tax as possible, and is happy to wait 3 months for her LGPS lump sum/ first monthly pension payment.

Unfortunately, I had far too many 'conversations' with people who insisted on taking their AVC payments right to the wire, and then kicked off because they didn't get their payments within days of retirement.  

And PLEASE don't say that the pension can 'just' be paid using estimated figures, and then adjusted once the real figures are received.  This is only done as a last resort, as it isn't simply a case of pushing a few buttons.  The old calculation has to be unpicked, then manually re-calculated, taking into account monies already paid.  This takes at least 3 times the amount of time taken to do one actual calculation from scratch.

billywhizz1966

Thank you both for your very helpful responses. I will sit down tonight and work through them
In terms of the payment date Silvertabby, as someone very aware of the operational issues I think this is the likely position
At risk at present : figures supplied on redundancy only. Pension currently to go if just left £27k but as redundant on the grounds of efficiency will be not reduced so I believe £34.5k
Likelihood is 3 months notice will be given in April so 3 months will see her paid until June. No decision as yet whether will need to work it not
We are more than happy to wait for the AVC to start in say October if it takes that long to release and to allow us to make the larger contributions that I estimate will be tax free based on the calc of 20 x Pension plus TFLS plus AVC being about 70% of LTA. If I understand you and the scheme correctly. are you saying that the pension which would normally start at say July would not start until October as well which in essence would mean no income for those months rather than it being backdated. This would be fine as we have enough savings to enable this to happen but just want to confirm the position that appears to say pension starting in around October 2021. Is this allowed under the redundancy rules ?
Maybe one that cannot be answered but any help will be gratefully appreciated
    
  
  

 

TVAS

The first 30k is tax free. The rest is taxable. She doesn't need income immediately as a) she has the lump sum and b) she probably has other savings because savers tend to save elsewhere as well as in pensions so all the cancelling of the AVCs early is not required in my opinion. 

jamjar92

I am thinking is doing is applying for one of the 0% purchase cards just before retirement date so I can max the payments into the AVC with an overlap on the otherside to cater for delayed pension payout, obviously not everything can be paided for using a purchase card thats what savings are for.

Silvertabby

billywhizz1966 said:

Thank you both for your very helpful responses. I will sit down tonight and work through them
In terms of the payment date Silvertabby, as someone very aware of the operational issues I think this is the likely position
At risk at present : figures supplied on redundancy only. Pension currently to go if just left £27k but as redundant on the grounds of efficiency will be not reduced so I believe £34.5k
Likelihood is 3 months notice will be given in April so 3 months will see her paid until June. No decision as yet whether will need to work it not
We are more than happy to wait for the AVC to start in say October if it takes that long to release and to allow us to make the larger contributions that I estimate will be tax free based on the calc of 20 x Pension plus TFLS plus AVC being about 70% of LTA. If I understand you and the scheme correctly. are you saying that the pension which would normally start at say July would not start until October as well which in essence would mean no income for those months rather than it being backdated. This would be fine as we have enough savings to enable this to happen but just want to confirm the position that appears to say pension starting in around October 2021. Is this allowed under the redundancy rules ?
Maybe one that cannot be answered but any help will be gratefully appreciated
    
  
  

 

No, the pension would be backdated to the date first payable (the day after the last day of service/retirement date).  The lump sum will have interest for late payment if paid more than a month after the due date.

Stonesmike

Waited 4 months for my lgp to come through, fortunately I had savings to rely on.

Silvertabby

Stonesmike said:

Waited 4 months for my lgp to come through, fortunately I had savings to rely on.

Was that during Covid and/or with AVCs?