We'd like to remind Forumites to please avoid political debate on the Forum... Read More »
We're aware that some users are experiencing technical issues which the team are working to resolve. See the Community Noticeboard for more info. Thank you for your patience.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
Sanity check on LGPS Prudential salary sacrifice AVC and tax free limit
Options

Larry_M
Posts: 46 Forumite

I'm hoping to retire in the next year and my AVC/lump sum will be over the tax-free limit so I'd be grateful for a sanity check. Very roughly speaking, if my normal pension will be £21k I understand that the tax free limit will be roughly £21k x 20 / 3 = £140k, and if my lump sum is £30k and AVC is £120k I'll be due to pay tax (20%, I'm a lower rate taxpayer) on the total of £150k less £140 i.e. £10k x 20% = £2000.
Hopefully I've got this right so far? Now, if I'm continuing to pay £1000 per month into the AVC this means that this is going to end up getting taxed at 20% later, which effectively cancels out the 20% tax relief I'm getting in my payslip each month. But, being a salary sacrifice AVC I'm also getting 8% National Insurance relief each month, which means it is still worth paying into the AVC until I retire.
Is this logic correct?
One further question; when the tax is eventually taken will it be Prudential that do this after liaising with the LG employer?
Hopefully I've got this right so far? Now, if I'm continuing to pay £1000 per month into the AVC this means that this is going to end up getting taxed at 20% later, which effectively cancels out the 20% tax relief I'm getting in my payslip each month. But, being a salary sacrifice AVC I'm also getting 8% National Insurance relief each month, which means it is still worth paying into the AVC until I retire.
Is this logic correct?
One further question; when the tax is eventually taken will it be Prudential that do this after liaising with the LG employer?
0
Comments
-
Another option for using your AVC surplus would be to buy additional index linked LGPS benefits.2
-
My LGPS AVC is also due to be over my tax free lump sum limit but I intend to buy an additional LGPS pension with the excess. Got years to go yet before I can retire but adding as much as I can to the AVC rather than save in the bank.1
-
Silvertabby said:Another option for using your AVC surplus would be to buy additional index linked LGPS benefits.0
-
collins74 said:My LGPS AVC is also due to be over my tax free lump sum limit but I intend to buy an additional LGPS pension with the excess. Got years to go yet before I can retire but adding as much as I can to the AVC rather than save in the bank.
I am also in the LGPS and making AVC contributions however as I intend to take my LGPS Pension and AVC pot at 65 but wish to retire at c.62 I'm keeping an eye on my AVC contributions so that I don't overshoot my AVC tax free limit by too much. For me, I'm also paying into ISAs with the reason being they will help to fund my retirement from 62 to 65 as I don't wish to draw on my LGPS pension at 62 and have the actuarial reduction. I've got a small DC pot that I also intend to draw down in those years too (i.e. 62 to 65).
I'm not saying what I'm doing is any better but simply sharing my current plan.
I presume for yourself you're going to retire when you can afford to and don't mind taking the actuarial reduction on your LGPS pension before the normal retirement age?1 -
-
SarahB16 said:collins74 said:My LGPS AVC is also due to be over my tax free lump sum limit but I intend to buy an additional LGPS pension with the excess. Got years to go yet before I can retire but adding as much as I can to the AVC rather than save in the bank.
I am also in the LGPS and making AVC contributions however as I intend to take my LGPS Pension and AVC pot at 65 but wish to retire at c.62 I'm keeping an eye on my AVC contributions so that I don't overshoot my AVC tax free limit by too much. For me, I'm also paying into ISAs with the reason being they will help to fund my retirement from 62 to 65 as I don't wish to draw on my LGPS pension at 62 and have the actuarial reduction. I've got a small DC pot that I also intend to draw down in those years too (i.e. 62 to 65).
I'm not saying what I'm doing is any better but simply sharing my current plan.
I presume for yourself you're going to retire when you can afford to and don't mind taking the actuarial reduction on your LGPS pension before the normal retirement age?
However, lots of holes/weaknesses in my plan
1. Low cash savings held - just enough to cover three to four months of emergencies.
2. If Govt slash the tax free cash limit to say £100k then I won’t have the level of savings I expect in retirement but a bigger income I suppose being able to buy more LGPS. However I would slash my contributions to try and build some cash should this happen.
3. I can only access it from 57 from 2028 in an emergency and would need to take it with my LGPS to retain the max tax free lump sum element.
4. I still have a mortgage and if I paid less AVCs I could pay that down sooner, free up this cash then pay for some home improvements. At the moment I intend to pay for these when the mortgage naturally ends and therefore cannot fund large home improvements currently.
5. I have done a rough retirement draft budget completely unscientific and this could be wholly out and I may need to carry on for a few years more than 60 and using an ISA to bridge the gap may be better than going all in on AVCs.
However there are some good points:
1. I am a spender and if that AVC money were in an ISA I would have spent more on cars and holidays, no question about that and I wouldn’t be able to even think about retiring at 60,
2. It’s a life insurance policy in reverse building up each month if I don’t make it to retirement for my wife and kids.
3. The flexibility is great and I have reduced contributions some months, but my view now is to build it up as fast as possible in case I get made redundant and don’t have access to such a benefit in a future role or don’t earn what I do now.
4. I have kept a record of my contributions (gross and net) and with tax and NI relief and growth I have made £35k. Of course this could reduce with such a volatile world but no way would I have had this in the bank.5. My retirement calculations don’t factor CPI increases in the future so I may end up with more than I expect when these are factored in.I could be on the wrong path here and be putting too much in but I do know my personality and the temptation to dip into ISAs etc would be too great.Another observation I would make. I have spoken to lots of LGPS colleagues and told them about AVCs and tax free cash, salary sacrifice etc but they just look at me and say they can swap pension for lump sum. No way I would do this as I wouldn’t have enough income.Good luck with your plans.1 -
Thanks for the contributions. Is anyone able to answer my earlier supplementary question about the mechanics of how any tax would be deducted? Would Prudential just pay me the lower amount having taken into account the tax due? Would Prudential even know the annual value of the normal pension and the lump sum?0
-
Larry_M said:Thanks for the contributions. Is anyone able to answer my earlier supplementary question about the mechanics of how any tax would be deducted? Would Prudential just pay me the lower amount having taken into account the tax due? Would Prudential even know the annual value of the normal pension and the lump sum?
0 -
Pru recently paid my LGPS AVC direct to the pension fund. And the pension fund paid my combined lump sum and monthly pension. However my lump sums were within the tax free limit.1
-
SarahB16 said:Larry_M said:Thanks for the contributions. Is anyone able to answer my earlier supplementary question about the mechanics of how any tax would be deducted? Would Prudential just pay me the lower amount having taken into account the tax due? Would Prudential even know the annual value of the normal pension and the lump sum?0
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 351K Banking & Borrowing
- 253.1K Reduce Debt & Boost Income
- 453.6K Spending & Discounts
- 244K Work, Benefits & Business
- 598.9K Mortgages, Homes & Bills
- 176.9K Life & Family
- 257.3K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.1K Discuss & Feedback
- 37.6K Read-Only Boards