LGPS AVCs SIPPs

Best_Auntie

Thanks to encouragement and sound advice from the lovely people over on the how much to live on thread, I have decided to retire sometime between now and April 2027 next year aged 61.

I already have a DB pension in payment, I pay tax on this via a BR tax code. I work part-time, earning £15Kpa and will take my small LGPS CARE pension, when I give up work next year. I am a lower-rate taxpayer.

I have around £800 to £900 cash spare from my salary every month. (I've used up my ISA allowance). My thinking is to put that towards LGPS AVCs for the last 7 months just to gain the tax relief, then take it as a TFLS. I was also contemplating making an additional £1 to £2k one-off lump sum contribution from my savings as an AVC.

I've just had a conversation with the LG pension manager who has thoroughly confused me. Being part-time, my salary is low £15K pa, I only pay £16.80 PAYE and £20.90 NI. The person I spoke to suggested the only tax relief I would get would be through salary sacrifice, the £16.80 would go into the AVC, but no other tax relief would be credited to the AVC pot. Meaning that I would not get tax relief on the full amount invested. She said she had never seen anyone make a lump-sum contribution from anywhere other than their salary and didn't know if it was possible and that no tax relief would be payable.

If so, could I claim the tax relief back via self-assessment (I still complete one, as up until last year I had a small additional self-employed income)?

OR should I contribute to a SIPP and take it in April under the small pot rules? This would mean only 25% would be tax-free, whereas the AVC could be taken with the LGPS as a TFLS. Obviously, both options would come with charges.

Given the small amounts involved, is any of this worthwhile?

Related question:

What are the pros and cons of retiring at the end of this tax year or the beginning of next?

Baldytyke88

A SIPP can be claimed at any time if you are at pensionable age. I have a SIPP for the same reason; I wanted a pension that I could cash in when required and not at the same time as my LGPS.

I am also contributing to my AVC, because that is the best way to reduce your tax payments. It's always worthwhile, my AVC is small, I only started it earlier this year.

I will be claiming my WYPF straight after its increase with CPI, in April 2027

DRS1

Are you sure the AVC contribution would be by salary sacrifice? You cannot sacrifice below the national minimum wage - no idea how close to that you might be.

I suspect the contributions would be net pay contributions (especially if they did not mention an NIC saving).

Even if salary sacrifice is possible or they use net pay it would probably not be very tax efficient if your actual tax bill is as low as you say. You would be better contributing using the relief at source method. If that is not available for the AVC scheme then you may be forced to use a SIPP. I don't think trying to reclaim tax via self assessment if the pension scheme hasn't claimed the basic rate tax relief will get you very far if you haven't actually paid very much income tax in the first place. They are not going to refund tax you haven't paid.

With the SIPP you would not have to take the benefits at the same time as you take the LGPS benefits. And even if you have no taxable earnings or profits you can still contribute up to £3600 (gross) to the SIPP each tax year until you are 75 (assuming you have the money to spare).

Triumph13

The key question on the tax relief is how big is the DB pension you already have in payment? If it is > £12.5k then no worries, you will still get full tax relief on any LGPS AVCs, either via self assessment or via getting the tax code on the DB pension changed.

What your LG pension manager is concerned about is that if post-AVC earnings are less than the personal allowance, people effectively get no tax relief on the AVCs as they were never going to pay tax anyway. These people are better off using a SIPP. That all changes if you have other sources of taxable income - like your existing DB pension.

Rule of thumb for those planning to take LGPS benefits as soon as they retire, and who haven't exceeded the max TFLS they can get relative to the size of the LGPS DB and the overall lifetime limit, is that if, you would still be liable to pay some income tax once all your income streams are added together, then AVCs win. Once the AVCs get big enough to stop you paying any tax at all then change to SIPP.

blue_eyes

There has been a known issue for years where low earners have not got tax relief when it's directly taken out of your wage before tax (unlike those earning enough to benefit from all their pensionable contributions reducing their overall tax payable).

A fix for this is being implemented retrospectively back a couple of years and LGPS should be aware of this as it's on their own website
https://www.lgpsmember.org/2026/07/03/hmrc-pension-payments-for-lower-earners/

it's also explained here
https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/pension-tax-relief-problems-low-earners#2

That might not be effective if you're doing salary sacrifice [since you can't sacrifice below minimum wage as has been mentioned] but in principle if you're not doing salary sacrifice, this should mean that you get the benefit of the full tax relief on your pension payments, albeit in the year after contributions.

So while the salary sacrifice option is specific to the structure of that system, for those low earners paying into LGPS normally using net pay, pension payments should now be eligible for relief, even on tax you have not paid. Assuming the AVC is paid out when the pension is put into payment, the AVC when paid out, forms part of the lump sum and is therefore usually wholly tax free, unlike a SIPP where only 25% is tax free. That may or may not be relevant in your future situation.

Of course this being new you're dependent on HMRC contacting you initially to confirm eligibility.
So if you think this might apply to you, you might want to go back to LGPS and ask them to confirm your potential AVC payments are covered by their website explanation.

Bobziz

The other consideration is that the advice seems to be to stop your AVC payments in good time before you actually retire to ensure your lgps pension and avc lump sum payments aren't delayed. Consequently you might only get 5 months AVC contributions made before you have to stop.

I pay AVCs with prudential and my experience is that they're very slow at most things they do, so if it were me I'd add to a sipp and avoid the hassle. This would also allow you to add additional contributions from your savings too.

blue_eyes

Fair point given the timelines

though the general points about the landscape changing for low earners should be reconsidered these days and not have old lines trotted out

In my case, while i stopped contributions two months out, my employer failed to notify LGPS I had retired, until i chased the lack of paperwork, so that was the biggest delay. Pru were quite prompt in comparison.

daveyjp

Timing retiring and withdrawal of AVC funds is complicated as there are a series of steps which all take time and need to be done consecutively, so making everything hit on a single day takes some planning - I'm in the middle of it and have just received the paperwork!

The AVC relationship is managed by your pension provider and they advise it takes 6-8 weeks for them to undertake withdrawal of funds from the Prudential AVC system. If you contribute right up until your last pay day you will need to leave it a few weeks for that last contribution to reach the Pru account so from your last pay day it may be 10-12 weeks before the AVC account can be closed.

The retirees role is to advise the pension provider what they want to do with the money. So if you intend retiring in April 2027 you need to start the process in Jan/February. Before that you will need to tell your employer of your intention to retire so they can inform the pension provider who then provides the many pages of pension information which you ened to sign off and return. For next April with AVCs I'd be triggering that in the next few weeks.

For these reasons it may be easier to put any funds into a SIPP which can be managed independently.

Triumph13

https://forums.moneysavingexpert.com/discussion/comment/82116335#Comment_82116335

Oops, I missed this change, sorry. In fairness, it sounds like the LG pension manager did too :)