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Free-standing AVCs

Discussion in 'Retirement' started by JanE60, Jan 15, 2019.

  1. JanE60

    JanE60 New commenter

    Anyone paid into these? Anyone reaped benefit? Withdraw all as lump sum or leave as tiny pension? Any thoughts or experiences?
  2. Marshall

    Marshall Star commenter

    I would be interested in this answer too. I have contributed for years at 200 a month and the annual report is very low. Not sure I doing the best with the money.
  3. eljefeb90

    eljefeb90 Senior commenter

    Yes. I thought these would be a good way of bridging the gap between early retirement a nd getting the state pension. As soon as AVCs came out , I paid into them...for about 24 years in total. I built up a pot of £80000 during that time. Luckily , the pension freedoms instituted by Osborne (the only good thing he ever did!) meant that I was not obliged to take out an annuity. Annuity rates were poor and I didn't want to shift the pot into another savings vehicle, so I withdraw yearly chunks to supplement my Teachers' Pension. Twenty-five percent of this sum is tax free. I really look forward to this annual boost to both my finances and my mood!
    Sundaytrekker likes this.
  4. Sundaytrekker

    Sundaytrekker Star commenter

    I saved into my AVCs over twenty years. They were the only additional pension on offer when I started. I accessed them at 60 when I retired. I didn’t want to take a small lifetime annuity as it was so low but I did want to access the lump sum in one go. In the end I took a flexiaccess drawdown over six years to give me some extra income to replace the state pension I haven’t got yet. My drawdown agreement includes guaranteeing the amount left in the pot after the six years then I can decide what to do with the rest.

    Pros? I decided I might as well pay money into the AVCs as pay it in higher rate tax. The newer flexibilities in accessing it are useful.

    Cons? In my opinion putting money into the additional pension options with TPS is better value. This might depend on whether you are aiming for extra income for life or extra lump sums to span certain years.
    emerald52 and eljefeb90 like this.
  5. diddydave

    diddydave Lead commenter

    Yes. Once the Past Added Years scheme was abolished whenever we went into the higher tax bracket we'd stick it all into the AVCs - instant 40% increase. Now my wife is 55 and can draw down on it. In 3 years I will do the same.

    The new flexible withdrawals work for us. We take £16,000 a year as we age from 55 to 60, all of which is essentially tax-free (25% is tax-free and the remainder is just about the personal allowance for the year).

    It's not tied to the teacher's pension so can be taken separately meaning you don't have to take the ARB reduction on your pension.

    If you have left it to nearly the last minute and need to put away a lot quickly you can use up to 3-years of previous allowances - 5 years @ £16k a year - £80k in total and that's within the 3 year allowance I think.
  6. Bedlam3

    Bedlam3 Star commenter

    I pay AVCs and I am pleased that I do. I plan to use them to live off between 55 and 60 and then I can leave my teachers pension until I am 60 and then also use the lump sum to cover me until I get the state pension at 67. Being able to access them at 55 and to not have to buy an annuity with them is making them worthwhile for me and giving me the freedom to retire early.
    phlogiston likes this.
  7. Bedlam3

    Bedlam3 Star commenter

    @diddydave can you explain the 3 years allowance thing? Do you mean you can carry ove three years personal tax allowance?
  8. Prim

    Prim Occasional commenter

    So does this mean (man math) that if I put in £10k a year and I can back date this three years so that means if I save £40k this year into an AVC the governemnt will put an extra 40% in? Therefore pushing my investment to £56K? and if I add another 10k for the next 5 years I could boost this by another £50k plus 40% (£20k) giving me a total savings pot of £126k in 5years time with 40% contributions? If this is the case can I the draw 25% of this every year once retired tax free?
  9. ikon66

    ikon66 Occasional commenter

    I’m no expert but I don’t think anything you’ve said above is right other than the draw down and I’m not sure that’s correct either
  10. lindenlea

    lindenlea Star commenter

    Prim likes this.
  11. diddydave

    diddydave Lead commenter

    Working out how much you can put away isn't easy, particularly if you are going to use past year allowances. So don't take my figures as absolute you may need to get professional advice but this is my basic understanding.

    The term you need to refer to is "Annual Allowance", it is £40,000 a year but your TPS payments take up a chunk of this: https://www.teacherspensions.co.uk/.../annual-allowance-and-lifetime-allowance.aspx

    For using previous years you can use up to 3 years of unused allowances:
    However, you only get tax relief on your earnings from this year, so if you were to put in £120,000 but only earned £30,000 this year you would not (I believe) get tax benefits on the £90,000.
  12. diddydave

    diddydave Lead commenter

    Again with the caveat that I am no expert and this is solely my opinion - you may need proper professional guidance if you are to avoid any uncertainty.

    The specifics are complicated by the fact that part of your annual (£40k) allowance is used up by your (and your employer's) contributions to the TPS, there is also a 'growth' factor of the pension scheme - you need to ask TPS for the figures to check what allowances you have left from the last 3 years.

    You also only get tax-relief from this year's earnings. So if you earn £50k and put in £80k then there is NO tax relief on £30k and your tax relief will be 40% only on £3,649 (how much of your pay is in the higher tax bracket), no tax relief on your personal allowance of £11,850 and 20% on the remainder.

    The 25% tax-free you refer to is an incorrect interpretation of this figure.
    There are two methods of withdrawal.

    First method: you take 25% tax-free of the whole sum. The rest is then taxed at whatever tax-rate you are paying WHEN you withdraw it (so if you take out just your personal allowance and have no other income it will, in effect be tax-free)

    Second method is to take out any amount. 25% of that is tax-free and the remainder is taxed at your normal rate. You can do this each year and the 25% is tax-free for each withdrawal. So, again if you have no other income, you can use your personal allowance to get lump sums essentially tax-free. That is with a personal allowance of £11,850 you can withdraw £15,800 and pay no tax.
    £15,800 - 25% of £15,800 = £11,850

    (maths teacher man maths ;) )
  13. diddydave

    diddydave Lead commenter

    No, it's not the tax allowances you can use - there is an annual allowance of how much can be put into a pension, currently £40,000 so if you didn't use any up over the last 3 years you could put in £120,000 this year - but unless you are earning that much you would only get tax-relief (the major benefit of pensions) on your earnings from this year.
    Bedlam3 likes this.
  14. SingToAng

    SingToAng New commenter

    I am planning on using mine to bridge the gap between 55 and 57 when I will take my TP. I have been paying in for almost 30 years and they are worth more than double the amount I have actually paid in. They were a good idea for me. No one has said whether there are any charges though? I plan to take half at 55 and half at 56. Anyone know if there are charges and if so how much?
  15. diddydave

    diddydave Lead commenter

    There is a MVR (market value reduction) that varies daily. We'd set out expected retirement date as 55 so the numbers on the site matched what we were told was in it when we made the first withdrawal but there is no actual charge for making a withdrawal - just be prepared for a couple of hours on the phone being told everything that is in the paperwork they send out to you!

    You can be taxed on 75% of what you take out so watch out for your tax allowances.

    Or you can opt to take 25% of the entire amount tax-free at the start so you can change when you pay the tax. I prefer to take 25% each time rather than all upfront as the fund has been growing and it means that any growth in the future would all be taxed (potentially).

    We decided that we could survive (quite comfortably) on £30k a year so with both of us taking £15,800 a year we get it all tax-free. We put in enough to take us from 55-60.
  16. diddydave

    diddydave Lead commenter

    One other benefit of the AVCs is that, unlike some pension funds, they do allow you to use the new flexibility rules on how you take the money out. I had another private pension fund that didn't allow me to take out lump sums - before I left the TPS I transferred the other pension fund into the AVC so I could.
  17. ikon66

    ikon66 Occasional commenter

    I started avcs when I began teaching in 96 but stopped paying in after a few years given the statements I got every year and the pitiful annuity I’d get. Think it was about £8k I paid in. Now however with the bonus it’s worth £28k and going up about £120 per month so I’m just leaving it for the moment. Wish I’d carried on :(:(
  18. Prim

    Prim Occasional commenter

    My understanding is that if you are a 40% tax payer whatever you pay into a pension scheme receives the 40% tax relief not the difference between the 20% figure and your portion of the 40% salary?
  19. diddydave

    diddydave Lead commenter

    Sorry, no. Having done this over a number of years for both myself and my wife I know you only get relief from the tax that the money would have been charged, in the same way that not all of your income suddenly gets charged at 40% tax if you were to go £1 over the threshold.

    It is most easily understood through the AVCs that are paid from your salary as they are taken out BEFORE tax is calculated (tax relief at source) - the amount you put into the AVC is exactly that, it is free of tax. Nothing is added by the taxman or reclaimed by Prudential.
  20. diddydave

    diddydave Lead commenter

    In the last couple of years of teaching we altered my wife's payments to be 50% of her wage, even if you are in the last few months of employment it could be worth sticking it all in.

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