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HELP!! AVC and tax relief calculation

Discussion in 'Retirement' started by 60sunnysmile, Jun 20, 2019.

  1. 60sunnysmile

    60sunnysmile New commenter

    I read the posts often but this is my first ever post - here goes.

    I am thinking of starting AVC’s. I am planning on retiring at age 60 in August 2022, 3 years from now. I am a transition member with NPA of 65 for Final salary and NPA of 68 for Average salary. I have savings of £65,000 but recently read on this forum about AVC’s as a good way to use tax relief. I am thinking of using AVC’s to live on for the 5 year gap from 60 to 65 so that I only start my final salary pension at my NPA, (as to not incur any AAB on it). I understand that unfortunately I will have to take my average salary pension at the same time which will have 2 years AAB applied but I cannot wait another 2 years until I am 67.


    I have 15 years and 54 days teachers’ pension to date. I currently earn £38,500 per year (20% tax bracket) and I want to pay into AVC’s the most that I can without incurring any extra tax, (i.e. take advantage of the tax relief). I have tried to calculate how much I can pay in per year as AVC from my pay and I have come up with the figure of £15,960 a year for the next 4 years. Does anyone know if I have calculated this correctly? I would really appreciate any thoughts on this as i am thoroughly confused now having had many conversations with HMRC, TP, Prudential and various free financial advice services.

    Thanks in advance.
     
  2. diddydave

    diddydave Occasional commenter

    Sounds quite intricate so, as ever, I (and just about everyone else who posts here) will tell you to get a professional's advice - spending a few pounds for independent advice is probably going to be a wise investment...

    That said these are my observations (not an expert - just interested).

    If you wait until your NPA to take your final salary pension you do NOT HAVE to take the average salary pension at the same time. You only HAVE to do this if you take the final salary early (i.e. before NPA).

    You get tax relief on the money you pay in up to 100% of your paid income. This would, however, waste this year's tax free allowance. (£12,500). So I would say you would be better paying in £26,000 a year - that is everything that would be taxed at 20%. The AVCs are taken out of your pay packet before being taxed so there is no need to claim anything through a self-assessment tax return.

    Several warning notices (other than not being an expert) need to be raised
    1) Tax bands and laws can change
    2) The AVCs are exposed to the stock market, so could fall!
    3) As soon as you start taking money out of your AVC pot you drastically cut down on the amount you can put into another pension.

    I'm a little unsure as to your circumstance as I would have thought, from your age and service, you would be an NPA 60 not 65.
     
  3. mjfp509

    mjfp509 New commenter

    You can pay into your AVC or SIPP what you earn minus any other pension which is taken from your wage. Work out exactly how much teacher's pension you will pay in this financial year. Take that amount from £38,500 (your wage). This will leave you with the amount you can pay into. Double check but from a google search, I believe you contribute 9.6% to your pension so 9.6% of 38500 is £3696.

    So you should be able to contribute a further £34808 to your AVC or a SIPP (gross) this financial year.

    Have you looked into a SIPP rather than AVCs? It gives you more control over what you invest in. If you go down a SIPP route, don't forget to pay the net amount, not gross, as the goverment tops it up, e.g. you put in £100, it gets topped up to £125.
     
    Last edited: Jun 20, 2019
    60sunnysmile and diddydave like this.
  4. diddydave

    diddydave Occasional commenter

    Good point...I'd forgotten about the TPS contribution...but I'd still hold on to £12,500 as it would be tax-free this year, so £22,308 is the most I would put into an AVC (or SIPP)
     
  5. 60sunnysmile

    60sunnysmile New commenter

    "If you wait until your NPA to take your final salary pension you do NOT HAVE to take the average salary pension at the same time. You only HAVE to do this if you take the final salary early (i.e. before NPA)."

    Thanks diddydave for your replies. I did not realise this and it will make a positive difference to my pension income at age 67.

    In my calculation I took into account the £12,500 as it is tax free this year and the amount I will have paid into my pension this year (as mjfp509 correctly estimated as 9.6% of 38,500 which is £3,696). But I also included the amount that my employer has paid towards my pension (16.4%) which is £6,314. Perhaps this is wrong? The total paid into my pension would be £10,010.
    Adding this to the tax free amounts to £22,510 which is already tax free so the difference from my salary is £15,990 should be tax free if I put it into AVC's.

    mjfp509, thanks for you comments about SIPP which I have thought about but as I am not at all financially inclined (hence the uncertainty of this calculation) and I am not confident about investing, I am concerned that I may lose a lot of my hard earned money.

    "I'm a little unsure as to your circumstance as I would have thought, from your age and service, you would be an NPA 60 not 65."
    Diddydave, I only started teaching in 2011 so I am a transition member, but I have 15 years and 54 days teachers’ pension to date because I transferred in my pensions from all my previous jobs in industry as I thought the teachers pension is the best of all of them, and I still agree.
     
  6. mjfp509

    mjfp509 New commenter

    I'm not sure what you mean by hold onto the £12,500 this year?

    If the other person invested in a SIPP, he/she would pay £27846.40 and with the tax relief added it would equal £34808 gross.

    He/she can invest into an AVC / SIPP up to their working wage every year. Of course, you can invest more, but you don't get any tax relief then.

    Unless I'm completely missing something here, minus the teacher's pension contributions, the other person still could invest approx £34808 this financial year.
     
    Last edited: Jun 20, 2019
  7. diddydave

    diddydave Occasional commenter

    You can invest 100% of your earnings so yes they can put in £34808 as you've worked out.
    But, 'tax-relief' applies to earnings that would have been taxed.
    The personal allowance of £12,500 is not taxed so the tax-relief on this part would be £0.

    How tax is collected and rebated is tricky and I think can be confusing - but I think I've got it right, certainly doing it through the AVCs makes it easier to understand as they money is put in without being taxed and is therefore not 'topped-up' by the government (which is them returning the tax you have paid on that amount).

    So if you put in £34,808 the tax position is that you have 'earned' £0 for the year. Tax on this £0.
    If you put in £22,308 the tax position is that you have 'earned' £12,500 for the year. Tax on this £0 (as it is the personal allowance)

    I am fairly sure that if you put it, as you say, into a SIPP you have to complete a tax-return and the 'top-up' amount won't be as much as you say because it includes money that hasn't been taxed. If it did then doing so would be a massive bonus as not only do you not get taxed on the £12,500 but the government is paying you another 20% on top.
     
    60sunnysmile likes this.
  8. mjfp509

    mjfp509 New commenter

    Thank you - detailed explanation. Doing it via a SIPP you can definitely get that 'bonus' you allude to in your final paragraph, as I have done it and am continuing each year to do it ! Although I'm younger than the original poster, my plan is similar. Get to 55 and retire, exhaust my AVCs and SIPP to fund until 60, then I get the teacher's pension.

    The tax relief you don't have to apply for personally, as your SIPP provider does that. Some providers will add the tax relief onto your contribution immediately, but most you have to wait a couple of months for it to appear in your account.
     
  9. mjfp509

    mjfp509 New commenter

    You don't take the employer's contribution into account; it is irrelevant in your calculations. You just use your own pension contributions.

    I agree about the risk with investing, but an AVC is also a risk as that is linked to the stock market, just like a SIPP is.

    The saying is 'time in' the market, rather than 'timing' the market. You are normally advised to invest for at least five years, preferably longer, so you are in a difficult time frame given your circumstsances. Global trackers are a fund most DIY investers use. Have a look at Vanguard Life Strategy or HSBC Global for two decent choices.

    Yes, you could lose money, but you could also gain it. It is a gamble. If you are 100% sure about losing money, then you could still open a SIPP and not invest in anything. Just leave it there dormant and you will still get the tax relief added - it's better than being in a bank account as you're getting 25% interest. So, in your calculations for this tax year, if you deposited £27846.40, when tax relief is added bringing it to £38500, you would get £6916.60 essentially free !!

    If you just left it there without investing, inflation would eat away at it, but you are guaranteed not to lose money by the volatility of the stock market.

    A lot to think about....
     
    Last edited: Jun 20, 2019
    60sunnysmile and Prim like this.
  10. tracymicra

    tracymicra New commenter

    Your last suggestion sounds fantastic mjfp. Would I be able to do that? Open a sipp, not invest the money, but just gain a free top up from the government/ HMRC or whoever? I’m already claiming my pension (nearly 61) but still working 3 days for one more year at least, and paying into a new career average scheme now. Have got some AVCs that aren’t worth that much but haven’t paid in to them for donkeys years. Got some savings earning peanuts. But never heard of or considered your sipp idea. How would I go about it.....if I’m allowed ?
    Thanks
     
  11. tracymicra

    tracymicra New commenter

    I bet a lot of people would be interested in this.
     
  12. mjfp509

    mjfp509 New commenter

    I should have said '...bringing it to £34808', not £38500, in my last post.
     
  13. mjfp509

    mjfp509 New commenter

    I'm not sure on that to be honest. Because you are already claiming your pension, I am uncertain whether what you suggest is possible - it might be / might not be. I would suggest posting on moneysavingexpert forum in the pension section. That is where I, over the years, have gleamed all my information from ! There are some very clued up people on there who would know.
     
  14. 60sunnysmile

    60sunnysmile New commenter

    Thanks mjfp509 for your thorough reply.
    I am still a bit confused with this bit:
    "Yes, you could lose money, but you could also gain it. It is a gamble. If you are 100% sure about losing money, then you could still open a SIPP and not invest in anything. Just leave it there dormant and you will still get the tax relief added - it's better than being in a bank account as you're getting 25% interest. So, in your calculations for this tax year, if you deposited £27846.40, when tax relief is added bringing it to £38500, you would get £6916.60 essentially free !!"

    Why 25% when I only get taxed 20%? Where does the 25% come from?
    Thanks in advance.
     
  15. diddydave

    diddydave Occasional commenter

    I think there may be some confusion between the tax rate and the tax-free element of withdrawing money from the pension.

    When you take money out of a pension there are 2 options that allow you to take out lump sums.

    1) Option 1 - set up a drawdown plan. You can take up to 25% of the whole amount in a lump sum. That lump sum is tax free. The drawdown plan then pays you annual amounts - these all get taxed as normal income.

    2) Option 2 - you take out lump sums without a formal drawdown plan. From each lump sum you get 25% of it tax-free, the other 75% gets taxed as normal.

    You get a tax-free allowance of £12,500 this year. What this means is that, under option 2, you can take as much as £16,666.66 out this year without having to pay any tax (so long as you don't have any other income) because 25% of it would be tax free and the rest is your full personal tax allowance.
     
    60sunnysmile likes this.
  16. 60sunnysmile

    60sunnysmile New commenter

    Thanks diddydave for the clear explanation. I now understand that better.
    Some people have mentioned that SIPPs might be better but would there be any tax benefit for me in particular by putting my money in a SIPP rather than an AVC as I will need to start using it within a few months of the final payment being made.
     
  17. jonnymarr

    jonnymarr New commenter

    I think the 20%, 25% on contributions is a matter of perspective.
    For every £80 you put into a SIPP they add a tax rebate to make it up to £100. That's the 20% tax you have already paid that you're 'getting back'.
    However, some people prefer to view the same calculation differently - the £20 you get added is a quarter, or 25%, of the £80 you have 'put in'.
    Glass half full?
     
    Piranha and 60sunnysmile like this.
  18. 60sunnysmile

    60sunnysmile New commenter

    Thanks jonnymarr and from your clear explanation I now see how it is a matter of perspective and where I have been confused.
     
    jonnymarr likes this.

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