AVC fund advice please

Interested!

Hi, I’m 43, single, no kids and planning on retiring at 57, using LGPS AVCs to take as a tax free lump sum to subsidise the first 10 or so years of retirement until I get a state pension. I already have £24K in LGPS AVC, (all in the Pru International Equity Fund). I’m planning on paying a lump sum of about £75K into my AVC but I’m not sure which fund(s) it would be wise to invest in, any advice welcome (options below). The only other S&S investment I have is £19K in a Vanguard LS60 ISA. I have my own house with no mortgage and after paying in the extra £75K to my AVC, I’ll be left with about £70K in easy access savings. Thank You.

Dazed_and_C0nfused

I’m planning on paying a lump sum of about £75K into my AVC

Do you have sufficient earnings and carry forward available to be eligible to do that?

Even if you do is it tax efficient to pay it all in a single tax year?

daveyjp

Is your LGPS AVC salary sacrifice?  If so max out contributions and live off the £75k.

If not ask your employer why they aren't offering SS on AVCs.

Interested!

Including the current tax year and the 3 previous I am £87140 below the total £160000  (£40K per annum) allowance. However I earn less than £40K per annum so is my carry forward allowance reduced to 100% of what my income was in each of those years? I'm not sure what you mean by being tax effifcient to pay it all in single tax year? Many Thanks

Dazed_and_C0nfused

According to this it looks like the AVC uses the net pay method so if you were paying a very large contribution it would have to be dealt with outside of payroll.

https://www.lgpsmember.org/your-pension/paying-in/paying-more/#:~:text=You can pay AVCs if,as a Shared Cost AVC.

What this essentially means is any tax relief would be based on the tax you had paid.  So if you earned £35k and paid £4,500 in tax then the maximum tax relief you could get in one year is £4,500.

But paying the same amount over 2 tax years might generate another £4,500 tax saving.  

But before you consider any of that you really need to read up on the annual allowance.  Your situation is slightly more complicated by having a mix of DB and DC contributions but your salary is going to limit how much you can contribute in one tax year.

Linton

Interested! said:

Including the current tax year and the 3 previous I am £87140 below the total £160000  (£40K per annum) allowance. However I earn less than £40K per annum so is my carry forward allowance reduced to 100% of what my income was in each of those years? I'm not sure what you mean by being tax effifcient to pay it all in single tax year? Many Thanks

You are confused.  There are 2 separate limitations with different rules.
1) You personally cannot contribute more than you earn into your pensions in any tax year.  There is no carry forward.
2) The total contributed into all of your pensions by anyone in any tax year cannot exceed £40K.  But there is carry forward from the 3 previous tax years.   With DB schemes such as LGPS this gets rather more complicated.  I will leave others to explain. In your case since you earn less than £40K the £40K limit is irrelevent to you.

The tax efficiency becomes a problem if your contributions are taken before tax.  Say you earn £40K and you pay £40K into your pension then you dont get any tax beneft from the £12570 tax allowance as you dont pay any tax on that.  So overall £40K goes into your pension and nothing goes to you personally.

However if you pay into a pension after tax then with £40K earnings you can pay in 0.8 X 40=£32K.  HMRC add  the 20% tax refund so overall £40K goes into your pension and £8K-tax on £40K =£2514 goes to you.  So under those circumstances it would be benefical to pay into a private pension such as a SIPP rather than into AVCs.

Whether your AVCs are taken before or after tax I dont know.

As daveyjp indicates, if you pay into your pension via salary sacrifice things are quite different.  However it is not worth explaining how unless that applies to you.

Albermarle

Interested! said:

Including the current tax year and the 3 previous I am £87140 below the total £160000  (£40K per annum) allowance. However I earn less than £40K per annum so is my carry forward allowance reduced to 100% of what my income was in each of those years? I'm not sure what you mean by being tax effifcient to pay it all in single tax year? Many Thanks

For some reason lots of people seem to be aware of the ability to carry forward unused annual allowance, but  think it means you can carry forward unused tax relief from previous years, which you can not.
It is probably the most common misunderstanding about pensions we see on this forum.