Maxing out my Tax Free Payment into LGPS using AVC

TallPerson

Hi,  I am in the Local Government Pension Scheme and joined in 1990 and so my pension is part final salary and part CARE.  I want to retire early and also max out the amount of money I put in the pension in the next one to two years by setting up an AVC (I think rather than APC).

My understanding is that money paid into an AVC is tax free.  So my thinking is to live off my wife's pension lump sum (it only get 4.8% in an ISA) and pay all my taxable wages into an AVC to then get this back when I retire as a tax free lump sum?  Hence it has a 20% return assuming the AVC breaks even. Is this permitted or am I missing something, as effectively, I'm paying zero income tax whilst I work? Does it affect the contribution the employer pays into my main pension? Is there any tax issues down the road I'm will be subject to?

The only risk I see is if the money I pay into the AVC makes a loss of 20% so I get less back than what I paid in -  but surely this is unlikely as I assume the money is invested in fairly low risk investments. Is this my best option or is an APC better?

Any advice would be much appreciated. Thanks in advance

Dazed_and_C0nfused

TallPerson said:

Hi,  I am in the Local Government Pension Scheme and joined in 1990 and so my pension is part final salary and part CARE.  I want to retire early and also max out the amount of money I put in the pension in the next one to two years by setting up an AVC (I think rather than APC).

My understanding is that money paid into an AVC is tax free.  So my thinking is to live off my wife's pension lump sum (it only get 4.8% in an ISA) and pay all my taxable wages into an AVC to then get this back when I retire as a tax free lump sum?  Hence it has a 20% return assuming the AVC breaks even. Is this permitted or am I missing something, as effectively, I'm paying zero income tax whilst I work? Does it affect the contribution the employer pays into my main pension? Is there any tax issues down the road I'm will be subject to?

The only risk I see is if the money I pay into the AVC makes a loss of 20% so I get less back than what I paid in -  but surely this is unlikely as I assume the money is invested in fairly low risk investments. Is this my best option or is an APC better?

Any advice would be much appreciated. Thanks in advance

What method will you be using to make these contributions?

Net pay is the normal method for LGPS but if you planning on contributing 100% of your salary I'm not sure how that would work with the NI that was due each payday (assuming you earn enough to pay some).

How are you calculating the tax relief on the last £12,570 of those contributions?

Barralad77

Hi, it would help to know the numbers at stake (I.e., how much you would be putting into AVCs, what your Lifetime Allowance figure will be, and so on) but even without knowing those, the first thing that came to mind is that this might mean you effectively asking to be paid less than the minimum wage (which isn’t legal/possible), at least if your AVC contributions are made via salary sacrifice. Also, I ‘think’ you might only be able to take 25% of the AVC figure tax free (that’s if my interpretation of what you’re referring to is correct) but that also depends on the other numbers at issue.

MX5huggy

You need to establish if the AVC is offered via Salary Sacrifice (sometimes called Shared Cost) if it is then you save the NI as well as the income tax but you are limited contributions which will reduce your salary to National Minimum Wage. 

The amount you can take as tax free cash is limited to 25% of the value of the pension this is calculated as the compulsory lump sum plus the value of annual pension x 20 plus the value of the AVC. 

Practically it’s unlikely that you could contribute enough to an AVC in 2 or 3 years to hit this limit on a 35 plus year LGPS and even if you did you would be able to buy more LGPS at good rates. 

The bottom line is it’s a good plan to contribute as much as you can to the AVC using your savings if you can. You will have a choice of investments in the AvC from cash very safe to more risky and probably best avoided over your time period stocks and share funds. 

OldBeanz

Assuming you are not paid by Salary Sacrifice then you can pay all you salary into an LGPS AVC. National insurance is deducted first and you need to have other income to fully benefit as there is no benefit in paying in non taxable income. Paying all your taxable income into an AVC should allow you to draw all the money as tax free cash given you have been a member of the LGPS since 1990. Best get a move on if you are contributing this year as the Pru for one, are notoriously bad at delivering any concept of service.

AlanP_2

A great idea but you need to manage the amounts to optimise the benefit.



1) Find out the contribution method. It will either be Net Pay (deducted form salary before income tax calculated) or Salary Sacrifice where employer pays you a lower salary and puts the difference into pension thus saving both you and them NI (Note: This won't reduce the salary your main LGPS is calculated on).

2) Open an AVC ASAP and contribute all of Jan,Feb and March salary into it apart from the amount per month needed to cover NI and main LGPS contributions. Assuming you have paid a good amount of tax so far this year then you will get some of that refunded via the PAYE system. (subject to Minimum Wage requirement if it is a SS scheme). In practical terms it may be too late for January but you never know.

3) Once you know that you can optimise your contributions for the following years.

4) For any salary you CAN'T pay in to the AVC then open a SIPP and pay it into there (at 80% of the value to allow for tax relief - paying £800 in would be boosted to £1000 by tax relief and would count as a £1000 contribution against your taxable income). Not as beneficial as the AVC but typically 20% tax relief on the way in and only 15% on the way out (25% tax free, 20% tax on remaining 75% = effective 15% rate).


I followed these steps and delayed taking my LGPS at the point of leaving to allow me to get a good chunk out of the SIPP in point 4 at virtually zero tax over a couple of tax years. 

TallPerson

Hi, Thank you all for your advice. My LGPS uses Prudential for AVC and I think it's Net Pay but need to check with the pension people if they could bothered to respond to my emails.  I will now get this set up asap. All my payments will be from my wages after my NI and main pension is paid and I will also leave in my tax free amount. Thanks again for the advice.

dunnm1

Uncannily I have been looking at this today (appears too good to be true). I am certainly no pension expert and have only been in the LGPS for 6 months but I don't fully understand the implications of the Annual Allowance on this approach. Wouldn't the AA be exceeded? Don't really understand AA calculation for DB pensions, have always been in a DC pensions.

Dazed_and_C0nfused

dunnm1 said:

Uncannily I have been looking at this today (appears too good to be true). I am certainly no pension expert and have only been in the LGPS for 6 months but I don't fully understand the implications of the Annual Allowance on this approach. Wouldn't the AA be exceeded? Don't really understand AA calculation for DB pensions, have always been in a DC pensions.

Wouldn't the annual allowance used be a combination of the PIA for the normal DB part of the scheme + the contributions to the DC (AVC) part of the scheme?

AlanP_2

dunnm1 said:

Uncannily I have been looking at this today (appears too good to be true). I am certainly no pension expert and have only been in the LGPS for 6 months but I don't fully understand the implications of the Annual Allowance on this approach. Wouldn't the AA be exceeded? Don't really understand AA calculation for DB pensions, have always been in a DC pensions.

The AA may be exceeded or may not depending on salary, pay rises / promotions within year and CPI rates. The figure used is called the Pension Input Amount (PIA) and is basically:

((the increase in value of the pension that will be paid per year at retirement less the same value at the end of the previous year uprated for inflation) multiplied by 16).

Slightly more complex in reality but that is the basic concept).

It is a bit of an artificial construct to make the AA input from DB schemes consistent across them all and and an attempt to make their value for this calculation a lot closer to the simpler "DC amount paid in" value.

Some DB schemes are (were) non-contributory so just using contributions would mean that those people had an AA value of £0 which is obviously crazy if you think about it rationally.

The 16* factor favours DB against DC in as much as it implies that for a given contribution to a scheme you could withdraw 6.25% from a DC scheme when retired (100/16) whereas the generally accepted Safe Withdrawal Rate is 3.5 - 4% which calculates back to a at least a 25* factor.

For the overwhelming majority of LG employees I would say the answer is "not exceeded" as salary levels are not typically >£40k for most jobs and grades.

Use https://www.lgpsmember.org/help-and-support/tools-and-calculators/annual-allowance-quick-check-tool/ to check against individual circumstances.

AlanP_2

TallPerson said:

Hi, Thank you all for your advice. My LGPS uses Prudential for AVC and I think it's Net Pay but need to check with the pension people if they could bothered to respond to my emails.  I will now get this set up asap. All my payments will be from my wages after my NI and main pension is paid and I will also leave in my tax free amount. Thanks again for the advice.

Is there nothing on your intranet?

Check with yoir employer's HR / Payroll team as well. Whilst the local scheme may offer SS each employer would need to make adjustments to payroll to implement it for their employees. If they only have say 1 employee paying AVCs then the cost of implementing those payroll changes may not be justified.

My wife worked at an LA that had c400 employees, two of which were using AVCs so "cost per employee" would have been high.