AVC Maximum Tax Free Pot Calculation for LGPS

John905

Can anyone clarify the up to date calculation used for working out the maximum tax free lump sum you can build up in your AVC as part of the LGPS scheme? I thought I had this sussed, but have just had a meeting with the provider of my employer's new salary sacrifice scheme, and the amount he quoted me was a fair bit lower than I had worked out. I've had a good search on here, but ended up becoming confused by what seem to be several ways of reaching the total.

Silvertabby

Some LGPSs are using a more complicated calculation, but the old rough and ready one should give you an idea.  Note it will  never be possible to work out the exact amount of AVCs you can pay in that you will be able to take as cash, as the final value of your LGPS benefits won't be known until you have left, and the value of your AVCs can go up as well as down on a daily basis.

20 X annual pension (after any reductions for early payment)

1 X any automatic lump sum (from pre 2008 service only/after any reductions for early payment)

1 X AVC fund

Maximum tax free cash = 25% of total.

Don't stress too much about going over the limit - any residual can easily be converted to additional LGPS benefits.

John905

Thanks Silvertabby, you've been fantastically helpful as always. One further question though. When I have the maximum tax free cash total, do I then need to subtract the tax free lump sum I'll have from my pre 2008 service to calculate the max tax free pot for the AVC?

Silvertabby

No, that's all accounted for.

Using some very basic figures:

20 X £20K annual pension = £400K

1 X Pre 2008 lump sum = £10K

1 X AVC = £100K

£400K + £10K + £100K = £510K X 25% = £127,500

In this scenario, your maximum tax free cash exceeds the total of your AVC and pre 2008 lump sum - so if you want the full £127,500 you would need to raise the additional £17,500 by commuting (giving up some of your annual pension) at the p.poor rate of 1:12.  Doing this reduces the overall value of your annual pension, so the whole calculation would have to be re-done.  

£17,500 / 12 = £1,458 of annual pension given up

New figures:

20 X £18542.00 annual pension = £370,840

1 X commuted cash = £17,500

1X Pre 2008 lump sum = £10K

1 X AVC fund = £100K

£370,840 + £17,500 + £10K + £100k = £498.340 X 25% = £124,585

Or you could opt not to commute, in which case your tax free cash would be £110K, being the sum of your AVC fund and your pre 2008 lump sum.  Your pension would be the full £20K per year. 

Or if you pay more into your AVCs:

20 X £20K annual pension = £400K

1 X Pre 2008 lump sum = £10K

1 X AVC = £150K

£400K + £10K + £150K = £560K X 25% = £140,000

In this scenario, the total of your AVC fund and your pre 2008 lump sum exceeds your maximum tax free cash, but the easiest way round this would be to use the residual £20K to buy additional LGPS benefits. 

One last one:

20 X £20K annual pension = £400K

1 X Pre 2008 lump sum = £10K

1 X AVC = £122K

£400K + £10K + £122K = £532K X 25% = £133K

This is pretty close. Would actually be £132K total tax free cash and £20K annual pension, as not worth commuting/reducing the overall value of your pension for just another £1K (in my option)

So many sums, so many outcomes !

John905

Brilliant, that answers everything.