Civil Service AVCs and amounts

Yorkie1

I'm thinking of putting some money into CS AVCs, to help fund the gap between taking Classic pension on retirement at 60 in 7-8 years' time and taking Alpha at 65 (EPA2 for some of the Alpha years, actuarial reduction for the rest).

I understand that the pension contributions are taken from salary before tax. I also see, from the AVC application form, that you can choose to contribute a % of pensionable pay, or £x per month from pensionable pay.

If, for example, I put a figure of £1,000 per month on the form, how much would actually be deducted from my salary? Would it be £1K as shown in the application form, or £800 with the tax relief at 20% making up the £200 difference?

NB. My gross salary takes me just into the higher rate tax band, but I think any further tax relief would be dealt with in a different way, not as part of the up front contributions like the basic rate?

Dazed_and_C0nfused

Yorkie1 said:

I'm thinking of putting some money into CS AVCs, to help fund the gap between taking Classic pension on retirement at 60 in 7-8 years' time and taking Alpha at 65 (EPA2 for some of the Alpha years, actuarial reduction for the rest).

I understand that the pension contributions are taken from salary before tax. I also see, from the AVC application form, that you can choose to contribute a % of pensionable pay, or £x per month from pensionable pay.

If, for example, I put a figure of £1,000 per month on the form, how much would actually be deducted from my salary? Would it be £1K as shown in the application form, or £800 with the tax relief at 20% making up the £200 difference?

NB. My gross salary takes me just into the higher rate tax band, but I think any further tax relief would be dealt with in a different way, not as part of the up front contributions like the basic rate?

You don't get any pension tax relief with net pay contributions, you simply avoid paying tax on the bit of your salary which goes into the pension.

So if you want to get £1,000 into the AVC you would have to contribute £1,000.  But the actual cost on your payslip would often be just £800 as you have avoided paying tax on the £1,000.

Would likely be different if you were Scottish resident for tax purposes or a higher earner as you could cross over two or more different tax rates.

And there is never any extra relief you can claim with net pay contributions, you always receive the maximum possible tax relief via your pay.

Don't forget if you reduce your income enough you will stop making any tax savings as you wouldn't be paying tax in the first place, typically where your taxable pay drops below the Personal Allowance

Yorkie1

Ah, I see what you mean thanks. It's not deducted from the contribution, but results from the knock-on effect of there being less salary to pay tax on.

From my 2023 P60, taxable pay last year was £51K. Standard pension contributions last year were £3K, plus new EPA2 contributions from this April that will total about £1800 for the year. So adding £12K AVC shouldn't take me into Personal Allowance territory, I think.

Dazed_and_C0nfused

Yorkie1 said:

Ah, I see what you mean thanks. It's not deducted from the contribution, but results from the knock-on effect of there being less salary to pay tax on.

From my 2023 P60, taxable pay last year was £51K. Standard pension contributions last year were £3K, plus new EPA2 contributions from this April that will total about £1800 for the year. So adding £12K AVC shouldn't take me into Personal Allowance territory, I think.

Correct, you'll still be paying plenty of tax 😆

It looks like you are already close to or are actually avoiding higher rate tax so unless you are Scottish resident for tax purposes the tax savings on the AVC is going to be at 20% although any pay rise/cost of living bonus may tip you back into higher rate territory (ignoring the new AVC contributions).

Yorkie1

Thanks (not Scottish!)

michaels

Are you sure it works out better financially to use AVCs rather than just extra Alpha contributions and accept the actuarial reduction?

Universidad

michaels said:

Are you sure it works out better financially to use AVCs rather than just extra Alpha contributions and accept the actuarial reduction?

Good to question this. Let me know if my maths looks off:

So for someone who's about 53 right now, 1000 pounds per month buys about 920 pounds of added pension per year.

(However, under the new SCAPE rate, that will be lower. finger in the air guess would be it would only buy about 850?)

850 per year amounts to about 13600 back over your whole lifetime (regardless of whether you take it early) if you live to your mid 80s

So it's not a great deal, honestly - 12000 in, 13600 back out. You've got the tax advantage on the way in, and you've got the fact that it tracks inflation, and that it's guaranteed income that all speak in its favour.

But you get the tax advantage on AVCs as well, and over 20 years I think most people would expect to do better than even with inflation, even in low risk funds?

michaels

Alternatively  £12k invested in a sipp growing at 2% above inflation for 14 years gives 15.8k at age 67 which might buy an index linked annuity of £633pa (assuming 4% cost which is probably optimistic)....

Universidad

michaels said:

Alternatively  £12k invested in a sipp growing at 2% above inflation for 14 years gives 15.8k at age 67 which might buy an index linked annuity of £633pa (assuming 4% cost which is probably optimistic)....

You do pay a lot for a guarantee, but I must say that I am a sucker for that.

Yorkie1

Thanks all.

I started Alpha EPA2 this year, with the intention of doing that until retirement, so that would leave actuarial reduction for the Alpha years either 2015 - 2023 or 2022 - 2023 (depending on McCloud decision at Classic retirement aged 60).  [Given that Alpha amounts go up with inflation and Classic go up only in relation to salary increases (!), delaying Alpha is looking a better deal if I can fund the gap in other ways]

I can't do EPA and Added pension. It's one or the other, but you can do AVCs on top of EPA/AP.   [Edited - you can do these, my error!]

I can take the AVC from age 60 as a top up to the Classic pension, which is the purpose of considering it. An actuarial reduction of my Alpha to age 60 would be significant and not worth it I feel.

michaels

I do EPA and added