TPS member wants to increase pension contributions

TheGreenFrog

I have a relative who is a teacher (c 30 years old) and a member of the TPS.  She does a lot of extra tutoring and exam marking and expects that for this tax year she will, for the first time, be a higher rate tax payer.  She wants to put the excess income over the basic rate threshold into her pension and has asked me the best way to do this! 

I have done some research and the main options seem to be:  a) AVCs; b) buy additional pension (multiples of £250) either via salary deductions or lump sum; c) faster accrual.

Faster accrual seems unavailable as election required proper to start of year.  Additional pension and AVCs are very different so I am wondering if there are any views on which might be better.  And if additional pension how salary deduction works - if it requires ongoing regular contributions then it may not be appropriate as next tax year my relative may not earn as much.

Thank you for any pointers.  

kpk2000

I used to pay for Additional Pension in TPS - depending on age it costs between £2-3k to add £250 indexed linked of extra pension but this is eligible for tax relief (£250 per year in retirement so takes 10+ years in payment to recoup). This can be paid monthly from teacher salary (which automatically gets tax relief at the basic/higher amount) or up front - the up front method is is trickier to get the tax relief as it is paid from your own funds and not out of salary. HMRC can get in a muddle with the process of repaying the tax so this can take some time and effort.

I stopped paying for additional pension (using monthly pay) as they increased the amounts to get the £250 per year as interest rates increased (the Treasury do calculations to ensure the scheme is funded correctly). I still think it is worth doing AP if you are trying to make up for shortfalls in the TPS e.g. starting teaching later in life and have little DB pension.

Another factor with AP is that is is claimable in full from NPA (state pension age) - for me this is scheduled to be 68 and if I claim my TPS earlier than NPA the AP amount gets actuarially reduced (to accommodate paying it over more years until I die). You can take the TPS and any AP/AVC's from NPA minus 10 years according to current legislation.

I now pay into a SIPP as I can take this from 58 (hopefully). I put the same amount into a SIPP which then gets 20% added it to as as a form of tax relief. I am not currently paying 40% tax but I beleive the process is that a SIPP only gets the 20% contribution added into the SIPP and then you have to claim the extra 20% (up to the higher rate 40%) from HMRC which is extra time/admin. My aims is to have a couple of years pay equivalent in the SIPP which can take from 58and the leave taking my TPS pension at 60 as that is when the majority of my TPS is paid from.

AVC's are similar to SIPP but run alongside the TPS and are administered by Prudential (search on this form for issues wit Prudential!) My SIPP is paid from my funds and gets a 20% boost from the tax relief whereas AVC's are paid from the teacher salary straight from payroll into the AVC - this means HMRC never tax the paid amount so you get immediate tax relief of 40% if a higher rate payer.

I would do AVC myself but not for 2 reasons. Firstly you have to deal with Prudential and the range of funds to choose the investments from is very limited. With a SIPP I get a choice of providers (with lower fees than Pru) who are more customer friendly and have a range of fund choices for the underlying investments.

TheGreenFrog

Thank you that is very helpful.  I had almost excluded a SIPP as the small amount of (possibly one-off) contribution might not justify the admin costs but will discuss with my relative along with the other points you raise.

Bluebell1000

I use Prudential AVCs, it is fairly straightforward, and you can choose to put in either a lump sum or regular payments from salary. It takes a month or so for any changes or lump sum requests to go through, so you have to plan ahead, there's not quite the same immediate effect of paying into a SIPP. 

So far, customer service have been responsive when I've had a question and I've not had any problems with it. I transferred in some older pensions as well so everything was in one place. 

AP45

Jumping in on this. 
I have made small AVCs (£1125) to the TPS this year for the same reason (gross income c.£55k, made up of £35k teachers' salary and £19k freelance work). 

How do I claim higher rate tax relief on these AVCs? The basic rate is already taken care of because they are deducted from my salary pre-tax. 

On my self assessment form, is this the right box?: 'Payments to registered pension schemes (also known as PPR) where basic rate tax relief will be claimed by your pension provider (called 'relief at source'). Enter the payments and basic rate tax:' - but presumably I don't add on the 20% basic rate?

Thanks!

Dazed_and_C0nfused

AP45 said:

Jumping in on this. 
I have made small AVCs (£1125) to the TPS this year for the same reason (gross income c.£55k, made up of £35k teachers' salary and £19k freelance work). 

How do I claim higher rate tax relief on these AVCs? The basic rate is already taken care of because they are deducted from my salary pre-tax. 

On my self assessment form, is this the right box?: 'Payments to registered pension schemes (also known as PPR) where basic rate tax relief will be claimed by your pension provider (called 'relief at source'). Enter the payments and basic rate tax:' - but presumably I don't add on the 20% basic rate?

Thanks!

You have completely misunderstood this.

You have already received any higher rate relief due.

You never include net pay contributions on the pension tax relief section of a Self Assessment return as you have already received the maximum possible relief.

If you don't believe me then you need to do two calculations, one of your total tax liability ignoring the £1,125.

And a second of your total tax with those contributions factored in i.e. use your actual P60 pay figure.  

You will understand it then.