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Deferring Teacher's Pension and using AVC's until 60

Discussion in 'Retirement' started by Compassman, Feb 9, 2020.

  1. Compassman

    Compassman Star commenter

    My wife is intending to retire from Teaching in the summer of 2021 at age 55.

    She is thinking of not taking her Teacher's Pension until 60 (to get the maximum amount) but just take the Prudential AVCs out over a period of 5 years.

    Can she take out £12500 (the tax free limit) per year and not get taxed (except for the first year). I am thinking of something like this:

    2021/22 (the year she retires) - £12500 (subject to some tax due to her earnings April to August)
    2022/23, 2023/24, 2024/25, 2025/26 - £12500 each year but not subject to any tax due to it being below the threshold for tax)

    All theoretical amounts but it gives us something to think about.

    I also currently have my own deferred Teacher's Pension scheme as I left teaching at 53 but am still working in a non-teaching post but no doubt there will be some point in the near future where I too will want to claim!
     
  2. diddydave

    diddydave Established commenter

    She can take a lot more than that out!

    When you take lump sums out of the pension the first 25% is tax-free.

    What this means is that the remaining 75% can equal the tax-free allowance of £12,500.

    So, the total you can take from a pension fund and not have to pay any tax on it (so long as you have not other income) is £16,666.66
     
    eljefeb90 likes this.
  3. diddydave

    diddydave Established commenter

    ..and if you work it right you can do the same in the first year too...by this method.

    From April 2021 to August (5 months) put 100% of your salary into the AVC (or other pension fund). In September you can take out £16,666.67 and when all the tax stuff gets sorted out you will have, for the tax year 2021-2022, just the taxable income total of £12,500...so it's tax-free.

    *Caveat...check this with a proper financial adviser!
     
  4. Compassman

    Compassman Star commenter

    Big thanks for this....certainly food for thought. Obviously we are making plans early and worth looking at the best options.
     
  5. jonnymarr

    jonnymarr Occasional commenter

    Hmmm.. DD's invariably right about these things, so I'm loathe to stick my neck out, but 12.5k earnings all put into AVCs / or a SIPP (assuming 5 x £2500 wages for April to August ), then £16,666 drawn down that same Sept ( 25% of which is tax free ) - I would assume that would be treated as 25k of total 'earnings' for that tax year ?
     
  6. diddydave

    diddydave Established commenter

    I could well be mistaken, I am not sure about the legalities of paying and drawing out in the same tax year, hence the caveat to discuss it with a proper adviser but my understanding, using your figures, is that yes you'd have 'earnings' of £25k but pension payments are tax-deductable so you'd end up with a 'taxable income' of £12,500.
     
  7. Compassman

    Compassman Star commenter

    I did wonder about the 5 months of 'earnings' thing. I suspect that in that year (2021/22) we'd take a 'tax' hit but from 2022/3 financial year things would be a little clearer especially if she is not earning anything else.

    I may still have odd work here and there (in my new non-teaching job) but as we are taxed separately that would make no difference to her income.
     
  8. diddydave

    diddydave Established commenter

    My gut feeling, based on the fact that once you start drawing money out of the AVCs they do still allow you to contribute to a pension (albeit to a maximum of £4000), is that it would be ok...but it is definitely one to get a proper answer to, probably directly from HMRC.
     
  9. JanE60

    JanE60 New commenter

    LV (who took over the Teachers' schemes) say I can either take the whole sum out, with no tax on first 25% or speak to another provider about more staggered draw-downs as LV don't do this. I suspect that every new stage of advice will incur a management/consultancy fee. Thinking about taking it all before April as I haven't worked much this year (supply drying up!) but in next financial year will receive my teacher pension.
    Just wondering though, do HMRC still allow the 12.5k personal allowance on the remaining 75%, or does my 25% tax-free amount encompass this?? Very confusing...
     
  10. diddydave

    diddydave Established commenter

    A couple of things spring to mind.
    Firstly Prudential have always run the Teachers' AVC scheme but other providers have offered private pension schemes, I presume you had one with Teachers Assurance.
    My wife had a private pot with another company and as we reached the point of stopping work we transferred it all into the Prudential AVC for exactly that reason - they do allow you to take random amounts out at any time, with each one being 25% tax-free. You may be right about fees etc but it's worth checking if you want to do that. One problem is that the Prudential Teachers' AVC will only let you transfer into it if you are in pensionable employment and many supply teachers cannot pay into the TPS. However, you can look around to see who else allows lump sum withdrawals and transfer it to them instead.

    You get 25% tax-free of the lump withdrawal and then any more is taxable income -assuming you have no other income in the year then that means that the first £12,500 is also tax free and then the next £37,500 is taxed at 20% and then the next £100,000 @ 40% and anything over that @ 45%.

    Taking it all out in one go can therefore be very inefficient tax wise.

    It's probably worth setting up a chat with Pensionwise who should be able to give you some advice.

    One other thing to consider is that you can take 25% of the whole amount tax-free and then buy an annuity with the rest, there are several types. For instance you can buy a fixed term one - we looked at doing a 5-year one to cover the 55-60 gap and it was pretty reasonable...it should be possible to find one that pays out the same as the personal allowance if you wanted to keep it out of HMRC's grasp.
     
  11. heldon

    heldon Occasional commenter

    I transferred my avc with prudential to a sipp with hargreaves lansdown.

    I am using it to cover three years until I take my teachers pension aged 60.

    I draw about £26 k each year and 25% is tax free for each drawdown. I actually get a payment each month, just like my salary.

    I will clear it to £0 as I get to 60 as that was it's purpose, to cover the gap.

    my wife will follow in my steps when she hits 55 and do the same with her sipp, although hers will be a drawdown of about £20k per year, meaning only £500 paid in tax. She will then take her teachers pension at 60.
     
  12. Sundaytrekker

    Sundaytrekker Star commenter

    I used LV. I transferred by Prudential AVCs to them and took a fixed term annuity to cover age 60-66 when I will get the state pension. I haven’t used it all but have chosen an income amount close to the old value state pension. I have taken the lump sum and have a guaranteed value for the remaining amount to decide how to use it from 66 onwards. Yes, I paid a fee of a bit over £1000 as regulations required that I spoke to a financial adviser ( phone advice). I was told this type of annuity meant that any future pension contributions were restricted but this doesn’t apply to TPS because it’s not a defined contribution scheme. I think they said that this rule doesn’t apply if you drawdown amounts taking 25% tax free each time. I think the rule is trying to stop people using large pension sums to circulate between funds and gain a tax advantage. Anyway, this is working for me to top up my teachers pension before I get my state pension.
     
  13. Luvsskiing

    Luvsskiing Established commenter

    Unless there are health issues, I'd definitely put off taking your pension early if you can. I just took the 25% tax free lump sum from an AVC in one go and stuck it in a savings account, just in case the stock market went bad, then am taking £12.5k tax free a year.
     
  14. sci

    sci New commenter

    It may be worth your while looking at your whole pot with Prudential and comparing the amounts you might get with a different provider. In other words your annuity with prudential may be hundreds of pounds less than if you transferred it.
     
  15. Sundaytrekker

    Sundaytrekker Star commenter

    I started with the Money Advice Service website for comparison:

    https://www.moneyadviceservice.org.uk/en/tools/annuities

    W
    hen I had found the top two I phoned them and further discussion and quotes ‘I’m sorry, such and such company are offering....’ got me better deals.

    Although I can see your logic of taking your AVCs and not touching the teachers pension till 60, it’s worth doing the sums to compare what you would get from taking it early with how long it takes to earn back that loss. Your AVCs could then last you longer.
     
  16. Compassman

    Compassman Star commenter

    Thanks for the help so far.

    Another question if my wife waits until 60 to claim her teacher's pension then how does that work regarding the 'career average' pension. Her main pension is 'final salary' (NPA 60) whereas the 'career average' element is NPA 67. Will the second element by reduced because she's taking it at 60 instead of 67. If so by how much?

    That said is it likely that the Fire Fighters resolution will have filtered through to other public sector pensions by 2026?
     
  17. diddydave

    diddydave Established commenter

    Under the current rules (which have got to change due to the legal challenge):
    If she waits until 60 then she has a choice. She can take just the final salary pension and leave the career average one until 67. Or, she can take them both with the actuarial reduction.

    If she takes the pension before 60 then there is no choice and you HAVE to take both pensions at the same time.

    The tables for taking them early are here, but they do not make easy reading with some complex combinations : https://www.teacherspensions.co.uk/...ement/early-retirement-factors-july-2019.ashx

    If she is still working then you use table ER7, if she has stopped working then it is table ER8.

    So, still working at 60 she would use table ER7 which is 77.9% but then two lots of 3% is deducted as her NPA is 67, 2 years more than 65...which means the calculation for the reduction is 0.779 x 0.94.
    This means she would get 73.2% of the career average amount.

    And, if she is not working at 60 she would use table ER8 which is 69.9%.

    -----------------------
    With regard to the firefighters resolution I would think that would have been hammered out pretty soon, the firefighters tribunal passes its requirement in July of this year. Given that the Government is keen to get every one onto the Career Average scheme as soon as possible I don't see them taking too long to get it all worked out, probably within a year, especially as everyone was due to be moved onto the Career Average by 2022
     
  18. Compassman

    Compassman Star commenter

    As ever many thanks for this excellent piece of information.

    I would like to hope that the will be a resolution to the career average scheme so that by the time she claims it in June 2026 it will have been sorted?!
     
  19. diddydave

    diddydave Established commenter

    Almost certain, the CA scheme itself isn't going away the only challenge was about who moved on to it and when. As everyone would be on it by 2022 I'd say it's a good bet that will still happen and the only change will be that up until that point everyone will be treated as being on the Final Salary scheme.
     
    reading66 likes this.
  20. Compassman

    Compassman Star commenter

    Yes I realise that it isn't going away and the question being as to whom it is going to be applied. I suspect those currently in their 50s are likely to be moved back to Final salary scheme?

    As I say I'd like to hope that by the time she's 60 in 2026 things might be a little more clear!
     

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