LGPS, AVC, and tax-free amount

Larry_M

I’ve been in the LGPS for 35+ years and paying into a Prudential AVC since 2014, latterly this has been as a salary sacrifice AVC so I’ve been packing as much as possible into it in order to save on NI and well as tax. I’m intending to retire in 3 years time at age 60 and would appreciate a refresh on the x20 rule and the tax free status.

In rough terms the figures are likely to be something like this:

Pension = £20k per annum

Lump Sum = 30k

AVC (if I carry on paying at the same rate) = £130k

So if I understand correctly the x20 rule is:

(£20k pension x 20) + £30k lump sum + £130k AVC = £560k.

£560k x 25% = £140k = maximum tax free amount. As this is higher than the combined lump sum/AVC of £160k I can only take £140k tax free. The rest would either have to be taxed or could be converted to additional pension.

If I’ve got this right (have I?), am I still doing the right thing to pack my AVC in these final few years, especially given the extra NI saving? I also have a SIPP which I could put more into as an alternative?

And if I end up over the tax free limit what would be the advantage of converting to extra pension rather than paying tax on the difference, wouldn’t I end up just paying tax on the additional pension anyway?

Silvertabby

A new calculation seems to have been introduced since I retired, but the old calculation will be close enough for now.

You will be able to use any residual AVC funds to purchase additional  LGPS benefits at very favourable rates.  Yes, this will be taxed income, but being fully index linked should soften this.  

Entirely your choice.  

AlanP_2

Just as an FYI that may affect some people.

My LGPS only offers the "buy more annual pension" with the excess option if taking it at time of leaving employment.

It is not an option if the pension is deferred.

This may or may not apply everywhere but worth investigating if you might be affected 

collins74

@AlanP_2 thanks for your post I didn’t know this.

 So just to check my understanding- if you become a deferred member and have an AVC, you lose the option of buying more LGPS benefits but not the taking it all as a TFLS?

OldBeanz

As far as I have heard and logic would dictate, you have to take the two pensions as one and whether early or late does not matter but as different authorities have different rules then best to check.
My wife applied for a forecast of pension and it came back within pounds of the online estimate she can do at any time. She is drawing hers early so we asked for the rate to buy more pension if she overshot with her AVC (she was not over at the time but will be before drawing)and they came back with a quote for with family benefits and without. They replied with the relevant amount for  each £ although I do not think the figure has been reduced for buying early.

Silvertabby

OldBeanz said:

As far as I have heard and logic would dictate, you have to take the two pensions as one and whether early or late does not matter but as different authorities have different rules then best to check.
My wife applied for a forecast of pension and it came back within pounds of the online estimate she can do at any time. She is drawing hers early so we asked for the rate to buy more pension if she overshot with her AVC (she was not over at the time but will be before drawing)and they came back with a quote for with family benefits and without. They replied with the relevant amount for  each £ although I do not think the figure has been reduced for buying early.

When AVC funds are used to buy additional LGPS benefits the factors used are age related.  So, £X amount of AVCs at 55 will buy less pension than the same amount of AVCs at 66.

AlanP_2

collins74 said:

@AlanP_2 thanks for your post I didn’t know this.

 So just to check my understanding- if you become a deferred member and have an AVC, you lose the option of buying more LGPS benefits but not the taking it all as a TFLS?

That's how mine operates BUT this may be a local decision and not universally applicable.