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AVC or SIPP

Discussion in 'Retirement' started by roblow, Oct 11, 2020.

  1. roblow

    roblow New commenter

    Hi there,
    I'm 54 and have been paying into the AVC for over 20 years. However on several financial blog sites it has been suggested growth isn't so good and I would be better off putting extra money into a SIPP invested in a global tracker (which I have now done). I am currently a higher rate tax payer but this will change next September. In the run up to retirement (planning at 60 or earlier if possible) would I be better stopping paying into the AVC and increase payment into SIPP, or keep it split between the two as I am at present.
    I intend to use the money to bridge between 60 and 67 when I get state pension.
    Thanks in anticipation of your help.
     
  2. letap

    letap Occasional commenter

  3. Sundaytrekker

    Sundaytrekker Star commenter

    AVCs also have the choice of cash and other sorts of funds. You can chose according to the risk you want to be exposed to. So, I’d say they are both savings pots where you have choices to make, both at the time of investing and when you chose how to take your money on retirement. The best thing to do is look at the charges for both and compare the types of funds. Then you can decide if you’d rather invest in one or the other or keep both. One advantage of teachers AVCs is the tax benefits are taken care of by PAYE and this isn’t always the case with SIPPs where you might have to claim tax back later.
     
  4. mustntgrumble

    mustntgrumble New commenter

    Hi,
    usual caveat - this is not financial advice.
    I was involved in the markets from about 1984 onwards - with disproportionate success. I sold my portfolio (apart from one key stock) in 2005 and moved to safer investments.

    At your stage I would do neither AVCs or SIPPs. Seriously - just look at the ftse over the last decade. As a higher rate tax payer investigate and consider buying additional pension and claim back tax on it. It far outstrips anything else at the moment. AVCs are sold to you. Someone is making money out of selling them to you.
     
    frodo_magic and Sundaytrekker like this.
  5. roblow

    roblow New commenter

    Is it really worth buying extra years with the McCloud judgement and its implications? Would the extra years be for final salary scheme or the new career average one? I thought it was also to be a rather expensive option. Thank you for any thoughts.
     
  6. mustntgrumble

    mustntgrumble New commenter

    This is really up to you to calculate.
    Certainly with a final salary scheme, claiming back tax (you get 20% back on any sum you put in as a higher earner) I got a final figure of between 6 and 7% on any years I bought. The tapered and CA scheme is probably not as good but I don't think will be far off. This is of course index linked. You try and buy an index linked annuity.. I am not sure they are even available anymore!

    The markets have been awful over the last decade. Bonds are at any low I've never heard of. The volatility in the markets means that any trend in growth is killed by the risk in being unlucky. I

    People with a lot more experience than I are saying don't buy property as an investment . Those times are gone. Neither labour or even the Tories like landlords.

    This is not only my opinion.. colleagues who have paid for independent financial advice have come to the same conclusion and bought accordingly.

    I am not selling TPS pensions, my key point is avoid the markets . It's full of very hungry sharks at the moment.

    Curently I have way too much in in cash having always lived balancing portfolio. Really, IMO, investments are very limited. I think I will end up in bonds at 1% at least the first 1k is tax free.

    You are entering a stage of your life where you have to reduce risk with a view to securing a predictable income.

    Just do very careful calculations about buying additional pension in the T PS and talk a lot to HMRC, they really are very good and do help.
     
  7. diddydave

    diddydave Lead commenter

    AVCs - if you do it through your monthly salary then there is no need to worry about having to claim tax relief from HMRC. If you put in a lump sum then you have to claim directly from HMRC and this can be trickier than it should because they don't always realise that you need to claim tax-relief at both higher and standard rates. (Other pension schemes automatically add on the 20% lower rate rebate).

    If you know about investing in funds and markets then doing a SIPP cuts out some of the management but you still pay them something, usually a percentage. Investments are not generally seen as a short term investment and I was always advised not to put in anything I couldn't afford to lose.
    Additional Pension is pretty much as risk-free as you are going to get.

    I did a comparison between ISA and Additional Pension, the basics of the ISA apply to other investments though but bear in mind money taken out of a AVC/SIPP will be, in part, taxable income:
    https://docs.google.com/spreadsheets/d/1hbQc1RbI2B5ri27mKMBlIFuMhKwKp0yGfSG7knjxB2o/edit?usp=sharing

    In terms of investment it will still work and the basics are fairly straight-forward even if the maths can be a bit tricky.

    Once you've bought the AP your lump sum is gone from your 'wealth'. Should you die there is no pot of money that will be given to your heirs. Your partner should get half of the pension though for their lifetime.
     
  8. Prim

    Prim Occasional commenter

    Or you could just continue with your AVCs and let PAYE take care of the tax and save the rest, the rate iof return is so poor at the moment and given that you are 54 you will lock a lot of your disposable income away??
     
  9. mustntgrumble

    mustntgrumble New commenter

    A fact of life as you approach retirement is that you need to get to love the HMRC. Filling in the online forms for recovering tax on a lump sum is a five minute job all you need is
    1 receipt letter from TPS of payment
    2 some limited p60 info – just one number
    3 I provide statement from Bank of funds leaving account.

    The HMRC form calculates the refund immediately

    ISAs have long since lost their lustre. Any bonds , savings accounts etc yield the first 1k tax free so at current rates an isa is pointless up to 100k investment.:(
     
  10. diddydave

    diddydave Lead commenter

    That's interesting I have seen a number of posts enquiring about problems in getting the full tax relief on the lump sums they paid TPS to get Additional Pension...can you point me at the right form as most of the ones I could find were all about getting the tax back when you took money out of the pension rather than putting it into one?
     
  11. frodo_magic

    frodo_magic Established commenter

    Any investment in the stock market e.g. via a SIPP should be considered medium to long term. If you're 54 and planning on retiring at 60, I wouldn't go down that route. As others have said, pay off all debts first, then just buy extra pension for the tax relief and known outcome, relax and be happy.
     
    roblow, mustntgrumble and wayside34 like this.
  12. mustntgrumble

    mustntgrumble New commenter

    Hey Diddy,
    If you are a 40% tax payer and you buy extra pension then you get 20% back. Eg buy 25k of pension.. You get 5k back.

    I have done this twice.

    If you go into your hmrc "gateway" and open your Self assessment form and complete it with "fake details" in particular the additional pension bit then it will calculate the amount you have overpaid at the end. Obviously don't submit it if details are fake!

    You need your p60 (or March payslip is better because you get all the contributions accounted for on the payslip).

    It does seem a tad unfair. If you earn 48k a year you get no tax relief. If you earn 52k a year then you get the 20% back.

    I belive the government was looking at this a few months back but I imagine a load of civil servants (identical scheme) persuaded the mps that there were more pressing issues.
     
  13. heldon

    heldon Occasional commenter

    strange I thought it was 20% tax relief up to the 40% threshold then 40% tax relief on everything above the threshold.

    I bought back to age 20 and paid off the contract a few years ago with a lump sum, I then claimed 20% tax relief back from HMRC, my wife did the same.

    I am aware you can no longer buy back years but the system should still be the same, is it not?
     
  14. mustntgrumble

    mustntgrumble New commenter

    Hi
    There was a big debate about this a couple of years back - not only on here but amongst colleagues at work. At the time the HMRC website was not quite so easy to use. Despite having quizzed a lot of people over this I eventually threw in my hand and bought 25ks approx worth of additional pension and claimed 10k tax back as a higher rate taxpayer. I did explain that this was my current understanding of grey law and was not trying to defraud the tax office.

    Within a week I got a reply - basically, nice try but no. The matter was also clarified over the phone by someone senior. I was only entitled to 20% back I think its an arrangement that TPS has with the tax office. The relief is provided by via TPS rather than reclaimable.

    Ive since bought more but the self-assessment website was more helpful this time.

    Trust me - I really, really tried to get 40% tax back!!!
     
    diddydave likes this.
  15. Prim

    Prim Occasional commenter

    I guess if you are earning a 100k and you haven't used your 40% allocation then no problem. If you earning 52k then your 40% allowance will have been used within your pension, any extra investment would only yield 20%? I think that is correct as a rule of thumb?
     
  16. diddydave

    diddydave Lead commenter

    I don't doubt you though I hope you are wrong ;)

    What gives me cause for doubt is that paying by instalments gets tax relief through the PAYE according to this document: https://www.teacherspensions.co.uk/...our-pension/additional-pension-factsheet.ashx
    That would be at whatever rate, 40% and 20%.

    Given that to buy £250 of benefits costs:
    a) £4640 in a one-off lump sum, or
    b) £4752 as 12 monthly instalments
    it cannot be right that the latter, as a basic rate tax payer, costs £3801.60 whereas the former will cost the full amount. I could see that the extra £112 for paying in instalments is to cover inflation and admin costs for the year.

    What we could do with is confirmation from someone who is buying AP by monthly instalments that they are getting (or not) that taken off of their gross pay before tax is calculated.
     
  17. mustntgrumble

    mustntgrumble New commenter

    Hi,
    yes. Someone paying in in monthly installments needs to chip in.

    DEFINITELY, if you buy a lump sum on the final salary scheme you get 20% back. I got the bank transfer from the HMRC form a purchase made in December about two months ago.
     
    diddydave likes this.
  18. diddydave

    diddydave Lead commenter

    Still not clear though if you got the 20% because it is the basic rate or if it is the gap between the basic rate and the 40% higher tax rate - and this is the crux of the lack of clarity.

    Most pension schemes give you tax relief at whatever rate you pay. But it is the tax rate for that amount only in the year in which you pay it.

    The instalment plan for AP gives you 40% tax relief if you earn more than £50,000 (I'm ignoring other pension payments for this at the moment) if it is deducted before income tax is calculated (this is how PAYE tax relief works).

    To my mind you should get full tax relief to make it the same as those who pay in instalments. However buying it in one large sum is likely to mean that most of what you pay would have been taxed at the lower rate anyway.

    For instance if you paid £25,000 for additional pension then you would have to be earning over £75,000 for that £25,000 to have been taxed at 40% and in that case, roughly, I'd expect you to get 40% back.

    However if you were only earning £60,000 then you should get 40% on £10k (the bit over £50k that was taxed at 40%) and 20% on £15k.
     
  19. diddydave

    diddydave Lead commenter

    Just got confirmation from someone who is paying in instalments for their Additional Pension that the instalments are NOT taxed before being deducted from their pay. This means that they will be getting tax relief at the full amount they pay. I.e. if they are earning in excess of £55,700 then, for any amount paid as part of their instalment plan over that they will be getting tax relief at 40%.

    If you are earning more than £55,700 and have bought AP with a lump sum then you should be getting tax relief at the full rate.

    However, suppose your lump sum was £5000 and your salary was £58,000 then you don't get 40% of £5000 back because not all of that amount was taxed at 40%.

    £58,000 gross salary has a normal Teacher Pension contribution deduction of 10.2% (= £5,916)
    That brings the taxable income down to £52,084.
    The £5000 lump sum therefore should get tax relief as:
    £2,084 @ 40%
    £2,916 @ 20%​
     
  20. mustntgrumble

    mustntgrumble New commenter

    Ha,
    Truly thanks for this Diddy.

    Your figures actually square with what I got back. It is marginally more complicated because is salary being done from April to April. The other things you quoted are also put into the tax form.

    To me it still looks like the best investment particularly if you come from a long lived family and are in good health.

    I've been planning all this for four years. Still trip over here and there. I really wish there was a more sincere and informed service for those approaching retirement. The decisions that anyone makes are too important and there is took much money involved to always get a straight answer..
     
    diddydave likes this.

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