Severance pay - AVC or Pay tax, Which Route

benny5

I appreciate this has been debated here in the past but I am about to make a decision based on actual figures.

Option 1) The amount subject to tax = £18000. TAX liability £4500 (Part @ 22% Part @40%) Leaving £13500 cash in hand to invest, spend, whatever.
Option 2) Opt for an AVC with immediate cash in hand of £4500 and an annuity (including partner) of £780 p/a (level) or £528 p/a (@3%).

My jungle maths goes something like this;
The £4500 in an ISA could yield £270 p/a, this plus the £780 annuity = £1050. My logic, assuming its not flawed, suggests that the returns against option 1) would have to better 8%. I realise I am loosing control of £9000 (£13500-£4500) for ever. However, being adverse to risk and mindful that interest rates may not remain at their present high levels, option 2) seems very attractive.


Any views.

jamesd

An AVC is an additional voluntary contribution to a pension. When does that become a cash payment to you an annuity? Is that a projection of benefits from the AVC if you make it?

You also have option 3, a contribution to a personal pension and option 4, any of the three but only for the higher rate tax portion.

Taking the income up to the edge of higher rate tax is a pretty good option because NI is reduced to 1% for the few thousand below higher rate, so the total tax you pay is reduced.

Will the employer make the contribution directly to the pension (AVC or personal) so that you and they don't have to pay NI on it?

What is the earnings status of your partner, if any? If your partner isn't working and has no pension of their own one of the best deals around is making pension contributions of 3600 a year after basic rate tax relief in their name. This is because you each get a personal tax allowance in retirement so you can get tax relief on the way in and pay no tax when you take the pension income.

benny5

Jamesd. Thank you for the feedback.


quote[An AVC is an additional voluntary contribution to a pension. When does that become a cash payment to you an annuity? Is that a projection of benefits from the AVC if you make it?] These figures are based on an immediate payment.

quote[You also have option 3, a contribution to a personal pension and option 4, any of the three but only for the higher rate tax portion.] Certainly something else to consider.

quote[Taking the income up to the edge of higher rate tax is a pretty good option because NI is reduced to 1% for the few thousand below higher rate, so the total tax you pay is reduced.] I had looked at this but not in the same detail as option 2

quote[Will the employer make the contribution directly to the pension (AVC or personal) so that you and they don't have to pay NI on it?] Yes. This is a direct transfer so no deductions.

quote[What is the earnings status of your partner, if any? If your partner isn't working and has no pension of their own one of the best deals around is making pension contributions of 3600 a year after basic rate tax relief in their name. This is because you each get a personal tax allowance in retirement so you can get tax relief on the way in and pay no tax when you take the pension income.] Partner in work with her own pension.