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LGPS AVC's - Lowering HICBT

edited 24 November at 3:47PM in Pensions, annuities & retirement planning
7 replies 431 views
cossie1990cossie1990 Forumite
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Afternoon everyone,

Just after a bit of advice (and a bit of a rant)

I am lucky enough this year to be just falling into the high income tax benefit charge after taking into account my pension contributions. Initially what I wanted to do was to just sign up for AVC's in order to keep below the threshold as I would rather pay into that then pay HMRC but when I ran the calcs on this it was a bit more significant of an impact to my take home pay than I thought - particularly in the next few years.

Rant - I am the sole income earner in my household, my wife doesn't work and I think it's grossly unfair that this is based on individual income rather than household income.

Rant over. So my question is, are AVC's all that? I do want to retire as early as possible so that means potentially another 25 years of working life minimum. The AVC's would obviously help towards this but would it be significant? It would be roughly £5k per year for the next few years then who knows.

Should I take the hit on the tax charge and keep the cash, particularly in the current climate or should I save for a rainy day? Should I look into something else and just put whatever spare cash I have in one lump sum at the end of the year to try and lower the charge? Anyone got any advice or been in a similar situation?

Thank you!

*Edited to add 25 years of working life :-(

Replies

  • edited 24 November at 4:01PM
    MX5huggyMX5huggy Forumite
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    edited 24 November at 4:01PM
    LGPS AVC’s are an amazing perk. Fill your boots.

    If your employer offers them via Shared Cost Salary Sacrifice it’s a gold plated perk. 

    £4800 per year (£400 per month) for 25 years growth of 5% for 25 years equals £250k that you could get out tax free. 

    Or you can take the income of £272 per month after tax and put it in an ISA for 25 years at 5% and you’ll have £162k 

    That’s before you consider the Child Benefit you will receive by using the AVC. 
  • phynix_ukphynix_uk Forumite
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    AVCs will win the race by a country mile in the long run.

    One thing of note. The AVCs are linked to your LGPS meaning at the point of drawing your pension you can use any AVC pot to fund the Tax-free cash element. The maximum you can draw is 25% of your total pension value. So in MXShuggy's example of having an AVC pot worth £250k your annual pension would need to be c£50k which is probably ambitious for most positions within the Local Authority. 

    That being said, AVCs are clearly extremely beneficial, you can always reduce contributions in the future (a long long way off) should the pot be getting close. Having an AVC pot in excess off the 25% isn't a problem, you just won't be able to squeeze anymore tax-free cash out of it and you're typically offered two options. Take it as a lump sum and pay income tax on 75% of it OR purchase an annuity. 
  • SarahB16SarahB16 Forumite
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    phynix_uk said:
    Having an AVC pot in excess off the 25% isn't a problem, you just won't be able to squeeze anymore tax-free cash out of it and you're typically offered two options. Take it as a lump sum and pay income tax on 75% of it OR purchase an annuity. 
    Can I just check please that as long as a person is within the LTA if they take the annuity (if they cannot take anymore tax-free cash) then there won't be any tax to pay by choosing to take annuity?   
  • edited 29 November at 6:49PM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 29 November at 6:49PM
    SarahB16 said:
    phynix_uk said:
    Having an AVC pot in excess off the 25% isn't a problem, you just won't be able to squeeze anymore tax-free cash out of it and you're typically offered two options. Take it as a lump sum and pay income tax on 75% of it OR purchase an annuity. 
    Can I just check please that as long as a person is within the LTA if they take the annuity (if they cannot take anymore tax-free cash) then there won't be any tax to pay by choosing to take annuity?   
    An annuity will just be another source of taxable income.

    Pretty sure there are no special exemptions just because it's bought with the excess above what can be taken as a TFLS.

    The actual tax due will depend on the other taxable income (and what type of income it is) each tax year the annuity is paid.

    But would typically be taxed at 20% or 40% assuming Personal Allowance is used on other sources.

    https://www.lgpsmember.org/your-pension/planning/paying-extra/additional-voluntary-contributions/
  • SarahB16SarahB16 Forumite
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    SarahB16 said:
    phynix_uk said:
    Having an AVC pot in excess off the 25% isn't a problem, you just won't be able to squeeze anymore tax-free cash out of it and you're typically offered two options. Take it as a lump sum and pay income tax on 75% of it OR purchase an annuity. 
    Can I just check please that as long as a person is within the LTA if they take the annuity (if they cannot take anymore tax-free cash) then there won't be any tax to pay by choosing to take annuity?   
    An annuity will just be another source of taxable income.

    Pretty sure there are no special exemptions just because it's bought with the excess above what can be taken as a TFLS.

    The actual tax due will depend on the other taxable income (and what type of income it is) each tax year the annuity is paid.

    But would typically be taxed at 20% or 40% assuming Personal Allowance is used on other sources.

    https://www.lgpsmember.org/your-pension/planning/paying-extra/additional-voluntary-contributions/

    My apologies I didn't word my question very well.  That's what I meant, i.e. there should be no tax to pay due to converting any excess (that cannot be taken as a tax free lump sum from the AVC pot) into an annuity but yes, the annuity would then just be another source of taxable income.    

  • phynix_ukphynix_uk Forumite
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    Dazed_and_C0nfused is correct. It's literally just another source of income taxed at your marginal rate. 

    In reality, if your AVC pot value is getting close to exceeding the amount you can use for TFC then other types of pensions should be looked at like SIPPs. They might be more expensive from an ongoing management perspective, but they offer flexible access meaning you can drawdown from them in stages and not have to purchase an annuity if not appropriate.
  • AlanP_2AlanP_2 Forumite
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    You can use the excess over the TFLS to purchase additional LGPS annual pension, rates are typically much better than for an annuity from comments seen on here.
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