Company AVC all taken as a lump sum

philng

I am currently in a final salary pension scheme (non contributory) and have requested info on AVCs-I have been advised that I can potentially take the whole AVC fund as a lump sum rather than reducing my company pension by taking part of that as a lump sum. I can also pay lump sums into the AVC.

I am a high rate taxpayer say earnings this yr £45000. How much can I put in to the AVC as a lump sum in this tax yr and benefit from 40% tax relief?

Is this a good thing to do?

My understanding is of a £10k inv into the AVC I will only in effect pay £6000 and on retirement I can draw the lump sum of £10k + growth. Is this right?

I am already maximising mine and my wifes equity ISA allowance and have done for the last few years and was looking to reduce tax paid on the rest of my savings and investments.

My wife is also going to potentially be a HRT payer in the next tax year so I will have to consider what to do with the savings currently in her name for tax reasons.

dasherman

The total amount you can pay into all your pension arrangements each year, including any AVC scheme, is limited to either of 100% your earnings or £225,000, whichever is lower.

jonathon_hart

You can pay more than 100% of your earnings into a pension scheme - you just won't get any tax relief on the amount over your total taxable earnings. The £225,000 is an allowance you can pay over that but will get stung by a 55% charge if you do.

The maximum Lump Sum you can take on retirement is 25% of the value of your pension. A final salary pension has a value of 20 times the final pension before any cash (its actually a little more complicated than that but that is a good rule of thumb).

jamesd

philng, about 4,000 net plus the gross value of the interest you've received from savings accounts this year. You'll get 22% added to the 4k for basic rate tax relief and can reclaim the higher rate 18% by writing a letter to your tax office telling them about your contribution.

You might instead consider starting a personal pension or SIPP if you want to diversify some of your pension risk away from your company's pension scheme and provide the ability to get some pension income between 55 and whenever the scheme lets you retire.

philng

What would be the benefit of a SIPP or Personal pension over the AVC-My main co pension is a final salary scheme so surely the AVC in itself would be diversification as this would be in its own fund?

The point I was making is that potentially from the AVC I may be able to take the whole fund as a lump sum rather than taking a lump sum from the main scheme and reducing the consequent pension payable ands whether this was a good thing to consider.

simonleblank

I think james has assumed that you have a normal tax code 5220?

jamesd

Depends on how your AVCs are treated and when you can retire. You can take a personal pension's benefits (including SIPP) from age 55 and that can be useful flexibility if there are penalties for taking a work pension when you want to retire. The personal pension and its lump sum can be enough to tide you over until you get normal pension benefits from work.

The personal pension options may have better investment choices that produce better results than the final salary scheme. Depends on how generous the final salary scheme is with AVC benefits.

The AVCs are presumably in the company fund so if the company goes bust you'd presumably be relying on the pension protection fund for them. A plan away from the company gives you a bit more protection since both aren't likely to go under.

If you can take all of the AVCs as a lump sum that may beat any personal pension's flexibility.

simonleblank, yes, I've assumed normal tax code.