Is it worth paying AVCs into my pension at my age?!

JoeyTh

Hi there, I've been paying into a final salary pension for nine years at 6%.  I'm a 57 year old female and hope to retire when I'm 65, but probably more likely 67 when I'm eligible for the state pension.   I'm now in a position where I can pay extra into my pension, but not sure if left it too late.   Should I contribute max of 9% for the remainder of my working life, which is eight years, possible 10?  Or should I put extra money into paying off my mortgage instead, which finishes when I'm 63? I just don't know whether the extra payments will increase my pension pot to a level that worth the extra money I'd be paying every month this late in the day.   Or, should I put money into an ISA or other savings scheme?  I'm a higher rate tax payer.  Thanks for any guidance you may have!  

Dazed_and_C0nfused

As a higher rate taxpayer additional pension contributions are very tax efficient, you can potentially get a pension fund of say £10,000 for just £6,000.

The consensus with such low interest rates is that paying off your mortgage is usually a very poor financial choice.

So you know which contribution method is used for the AVC contributions?  This makes a big difference to how much actually gets into your pension.

And will paying 9% into a separate AVC mean you are still expecting to be a higher rate payer?

JoeyTh

Dazed_and_C0nfused said:

As a higher rate taxpayer additional pension contributions are very tax efficient, you can potentially get a pension fund of say £10,000 for just £6,000.

The consensus with such low interest rates is that paying off your mortgage is usually a very poor financial choice.

So you know which contribution method is used for the AVC contributions?  This makes a big difference to how much actually gets into your pension.

And will paying 9% into a separate AVC mean you are still expecting to be a higher rate payer?

Thanks so much.  I don’t know which contribution method is used, but will try and find out.  I think I will still be a higher rate taxpayer if I go to 9% (I think!) you can tell this stuff isn’t my strong point....! 

jamjar92

Is this an LGPS avc facility?

Dazed_and_C0nfused

The two most likely methods for the 9% are,

Relief at source - this is where the contribution is taken after tax has been calculated on your payslip.  And the pension company adds basic rate tax relief to your pension fund.  So for example say you contribute £450/month then the pension company will add £112.50 tax relief giving you a pension fund of £562.50.  You notify HMRC of the total gross contribution made under the relief at source method and they increase the amount you can pay basic rate tax on by that amount, which in turn means less tax is paid at 40%.  If you pay enough higher rate tax that can save you £112.50 off your personal tax liability meaning that the £562.50 in your pension fund has really only cost you £337.50.

Net pay - this is where the 9% is deducted before your tax is calculated.  This means the maximum possible tax saving is obtained through your payslip and you never tell HMRC about it, they just get to know your lower taxable pay amount.  For example salary £60,000 less 9% pension contribution = taxable pay (the amount shown on your P60) = £54,600.  £5,400 goes into your pension fund and no tax relief gets added but the tax on your payslip will be £2,160 less than it would be without the 9% pension contribution.

JoeyTh

My current 6% contribution is deducted before tax is calculated.  I assume that will be the case if I up it to 9%? 

JoeyTh

Is this an LGPS avc facility?

jamjar92 said:

Is this an LGPS avc facility?

jamjar92 said:

Is this an LGPS avc facility?

I don’t know what LGPS is, sorry! 

Dazed_and_C0nfused

Local Government Pension Scheme

JoeyTh

It’s public sector rather than local government. 

AlanP_2

If you tell us which public sector scheme then I am sure there will be enough knowledgable people on here to offer comments.

Is it still a Final Salary scheme as most PS schemes have moved to some kind of Career Average arrangement I think? Still a fantastic deal by the way.

What other pensions do you have and how much do you want / need when you retire? 

jamjar92

JoeyTh said:

Is this an LGPS avc facility?

I don’t know what LGPS is, sorry! 

The LGPS AVC facility is the only public sector schemes that allow you to take the AVC back as a TFLS (subject to certain HMRC limits), which is very good deal. Other public sector schemese you are limited to 25%.

It depends what you want to do with your money at the other end, more pension from the scheme or cash draw down pot, to retire early and delay taking your DB pension.

The benefit of using the inhouse AVC is you get tax relief at source, paying into other pension vehicles you would have to claim the HRT element back. If it was paid into an ISA there is no tax relief.

I use the AVC to lower my salary so I am not an HRT tax payer bracket being on threshold, I divert any overtime and standby I do to achieve this with the added bonus of escaping the Child Benefit HRT charge.