Sanity check on LGPS Prudential salary sacrifice AVC and tax free limit

Silvertabby

Larry_M said:

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?

Somebody with more knowledge than myself I'm sure will be able to answer your question however it is my understanding that what you are proposing is not an option, i.e. any overshoot of the AVC tax free limit needs to be converted into an annual pension and you do not have the option of withdrawing it as cash as you propose even though you think you could and would pay 20% tax on it.  

Oh, this is different to my understanding, I didn't think there was such a restriction, is anyone else able to shed any light on this?@Silvertabby maybe?

It is indeed possible.  The LGPS will just request the amount they need from the Pru, leaving the residual to be taken by other means.  What happens then will depend on the Pru scheme - older contracts may be limited to a Pru annuity or a transfer out to an open market annuity.  But if the Pru contract allows for drawdown, then likely that OP will be able to take it as a one-off lump sum.  Note that the Pru won't have a tax code to apply, so they will probably deduct too much tax at the time of payment.  HMRC will sort this out eventually, just something to be aware of.  

SarahB16

Silvertabby said:

Larry_M said:

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?

Somebody with more knowledge than myself I'm sure will be able to answer your question however it is my understanding that what you are proposing is not an option, i.e. any overshoot of the AVC tax free limit needs to be converted into an annual pension and you do not have the option of withdrawing it as cash as you propose even though you think you could and would pay 20% tax on it.  

Oh, this is different to my understanding, I didn't think there was such a restriction, is anyone else able to shed any light on this?@Silvertabby maybe?

It is indeed possible.  The LGPS will just request the amount they need from the Pru, leaving the residual to be taken by other means.  What happens then will depend on the Pru scheme - older contracts may be limited to a Pru annuity or a transfer out to an open market annuity.  But if the Pru contract allows for drawdown, then likely that OP will be able to take it as a one-off lump sum.  Note that the Pru won't have a tax code to apply, so they will probably deduct too much tax at the time of payment.  HMRC will sort this out eventually, just something to be aware of.  

Really interesting to read this as whenever the AVC tax free limit had been exceeded I always heard about people converting the excess into a pension and didn't know the surplus could be taken as cash but subject to only say c.20% tax.  

I had always assumed if somebody exceeded their 25% tax free amount on their AVC pot they would be penalised if wishing to take it as cash and would be paying c.55% on this additional lump sum amount but on reading this is seems like it would just be taxed in terms of total income for the year if in this case the Pru contract allows for this. 

Sounds like a case of asking your scheme provider what your options are (definitely something for me to bear in mind if I exceed my limit).  

Silvertabby

SarahB16 said:

Silvertabby said:

Larry_M said:

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?

Somebody with more knowledge than myself I'm sure will be able to answer your question however it is my understanding that what you are proposing is not an option, i.e. any overshoot of the AVC tax free limit needs to be converted into an annual pension and you do not have the option of withdrawing it as cash as you propose even though you think you could and would pay 20% tax on it.  

Oh, this is different to my understanding, I didn't think there was such a restriction, is anyone else able to shed any light on this?@Silvertabby maybe?

It is indeed possible.  The LGPS will just request the amount they need from the Pru, leaving the residual to be taken by other means.  What happens then will depend on the Pru scheme - older contracts may be limited to a Pru annuity or a transfer out to an open market annuity.  But if the Pru contract allows for drawdown, then likely that OP will be able to take it as a one-off lump sum.  Note that the Pru won't have a tax code to apply, so they will probably deduct too much tax at the time of payment.  HMRC will sort this out eventually, just something to be aware of.  

Really interesting to read this as whenever the AVC tax free limit had been exceeded I always heard about people converting the excess into a pension and didn't know the surplus could be taken as cash but subject to only say c.20% tax.  

I had always assumed if somebody exceeded their 25% tax free amount on their AVC pot they would be penalised if wishing to take it as cash and would be paying c.55% on this additional lump sum amount but on reading this is seems like it would just be taxed in terms of total income for the year if in this case the Pru contract allows for this. 

Sounds like a case of asking your scheme provider what your options are (definitely something for me to bear in mind if I exceed my limit).  

Are you thinking of what happens when cash taken exceeds the all schemes total of £268,275?  

Horses for courses, but will just say that in my 20 years experience everyone with excess AVCs who had the option of buying additional index linked LGPS benefits did so..... 

collins74

Good thread this but I often think there is a gap in the market for a LGPS specialist financial advisor who deals with the scheme but sits independent of it and can give rounded advice but link it in with LGPS.  

It’s like me I have gone all in with AVCs but not taken any financial advice etc.  everything out there is geared up for DC pensions which I understand.

Aylesbury_Duck

collins74 said:

Good thread this but I often think there is a gap in the market for a LGPS specialist financial advisor who deals with the scheme but sits independent of it and can give rounded advice but link it in with LGPS.  

It’s like me I have gone all in with AVCs but not taken any financial advice etc.  everything out there is geared up for DC pensions which I understand.

I'm in the same boat.  Have hammered the AVCs for several years and have left old DCs deferred.  The AVC value is currently 38% of the LGPS+AVC total value, and growing.  I intend to take the 100% TFLS at the time I take the LGPS (up to the 25% limit) and use the excess to buy more LGPS.  The plan is that by doing so, I can comfortably commence the LGPS sooner than 67, perhaps at 62, having retired at 57 and using savings and DC money to bridge the five year gap.

It seems a sensible plan at the moment, but just got to keep an eye on any changes that might come in and affect it.

SarahB16

Silvertabby said:

SarahB16 said:

Silvertabby said:

Larry_M said:

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?

Somebody with more knowledge than myself I'm sure will be able to answer your question however it is my understanding that what you are proposing is not an option, i.e. any overshoot of the AVC tax free limit needs to be converted into an annual pension and you do not have the option of withdrawing it as cash as you propose even though you think you could and would pay 20% tax on it.  

Oh, this is different to my understanding, I didn't think there was such a restriction, is anyone else able to shed any light on this?@Silvertabby maybe?

It is indeed possible.  The LGPS will just request the amount they need from the Pru, leaving the residual to be taken by other means.  What happens then will depend on the Pru scheme - older contracts may be limited to a Pru annuity or a transfer out to an open market annuity.  But if the Pru contract allows for drawdown, then likely that OP will be able to take it as a one-off lump sum.  Note that the Pru won't have a tax code to apply, so they will probably deduct too much tax at the time of payment.  HMRC will sort this out eventually, just something to be aware of.  

Really interesting to read this as whenever the AVC tax free limit had been exceeded I always heard about people converting the excess into a pension and didn't know the surplus could be taken as cash but subject to only say c.20% tax.  

I had always assumed if somebody exceeded their 25% tax free amount on their AVC pot they would be penalised if wishing to take it as cash and would be paying c.55% on this additional lump sum amount but on reading this is seems like it would just be taxed in terms of total income for the year if in this case the Pru contract allows for this. 

Sounds like a case of asking your scheme provider what your options are (definitely something for me to bear in mind if I exceed my limit).  

Are you thinking of what happens when cash taken exceeds the all schemes total of £268,275?  

Horses for courses, but will just say that in my 20 years experience everyone with excess AVCs who had the option of buying additional index linked LGPS benefits did so..... 

I was thinking more of the DB pension x 20/3 limit really for the AVC limit.  I guess whenever I had read previously of people overshooting their AVC limit they always seem to buy the additional indexed linked pension.  I suppose I thought that was the only thing people could do and I'm sure it's what I'll do if I do overshoot the limit.  

Larry_M

@Silvertabby @SarahB16 Thank you to you and others for your contributions on this. I have now had confirmation from the LG pension service that I could take the excess that's over the tax-free limit. 

I agree that my best option would ordinarily be to use the excess to buy additional pension, but I might need to get my hands on as much cash as I can; if so I'm now concerned that the excess could take me into the higher tax band. So now I'm wondering whether in the remaining few months to pull back a bit on the amount I'm currently paying into the AVC and then squirrel away a bit of the resultant higher net pay. Any thoughts on this?

Silvertabby

Larry_M said:

@Silvertabby @SarahB16 Thank you to you and others for your contributions on this. I have now had confirmation from the LG pension service that I could take the excess that's over the tax-free limit. 

I agree that my best option would ordinarily be to use the excess to buy additional pension, but I might need to get my hands on as much cash as I can; if so I'm now concerned that the excess could take me into the higher tax band. So now I'm wondering whether in the remaining few months to pull back a bit on the amount I'm currently paying into the AVC and then squirrel away a bit of the resultant higher net pay. Any thoughts on this?

Just that speed of payment is of the essence, then cease your AVC payments at least a full month before your last day of service.  That will give the process longer to catch up.

Larry_M

Silvertabby said:

Larry_M said:

@Silvertabby @SarahB16 Thank you to you and others for your contributions on this. I have now had confirmation from the LG pension service that I could take the excess that's over the tax-free limit. 

I agree that my best option would ordinarily be to use the excess to buy additional pension, but I might need to get my hands on as much cash as I can; if so I'm now concerned that the excess could take me into the higher tax band. So now I'm wondering whether in the remaining few months to pull back a bit on the amount I'm currently paying into the AVC and then squirrel away a bit of the resultant higher net pay. Any thoughts on this?

Just that speed of payment is of the essence, then cease your AVC payments at least a full month before your last day of service.  That will give the process longer to catch up.

Thanks for the tip. It's not a speed of payment factor so much as having as much money available for use at a later date factor. 

SarahB16

Larry_M said:

Silvertabby said:

Larry_M said:

@Silvertabby @SarahB16 Thank you to you and others for your contributions on this. I have now had confirmation from the LG pension service that I could take the excess that's over the tax-free limit. 

I agree that my best option would ordinarily be to use the excess to buy additional pension, but I might need to get my hands on as much cash as I can; if so I'm now concerned that the excess could take me into the higher tax band. So now I'm wondering whether in the remaining few months to pull back a bit on the amount I'm currently paying into the AVC and then squirrel away a bit of the resultant higher net pay. Any thoughts on this?

Just that speed of payment is of the essence, then cease your AVC payments at least a full month before your last day of service.  That will give the process longer to catch up.

Thanks for the tip. It's not a speed of payment factor so much as having as much money available for use at a later date factor. 

Sorry I can't help but if your goal is to have as much cash as possible when you draw your AVC pot this is why I think it's good to think early on what are your goals (cash or additional pension).  If it's cash then best not to exceed the AVC limit. 

I definitely think it's worth ensuring a person doesn't pay 40% tax but when you are in the 20% tax bracket I know there are NI savings on making AVC contributions but for me I'd rather forgo the NI savings and put any spare money/savings into ISAs if it looks like my AVC limit may be exceeded and then draw down on the ISAs when I wish in retirement.  

Only sharing my thoughts as we all have different goals and my reply may help somebody but unfortunately, I'm sorry, I don't the answer to your query.  

* Edit (minor typo corrected - nothing changed in terms of sharing my opinions).