Paying into AVCs when going over 25% Tax Free amount

[posteee]

Isn't all of this dependant on whether or not you have "crystallised" your pension first ? If you haven't done so, doesn't it give you more flexibility ?

For clarification first (and RobertT you may be able to confirm), the term crystallisation simply refers to whether you have taken 25% of the pension tax free ? I am not sure on the exact definition.

However, I believe if the pension has not been crystallised, there is another option with the AVC's, or am I mistaken ? The other option I believe is called UFPLS, standing for Uncrystallised Funds Pension Lump Sum.

With this method, I understand you can withdraw amounts as often as you like (as long as the pension hasn't been crystallised), and pay tax on 75% of the withdrawal as opposed to 100% (at the prevailing tax rates as usual). I have quite a few queries with this method.

One is, if you withdrew £12,000 one year using this method, and that was the total income you had earned for that year (no other income whatsoever, say for example you had left Royal Mail but had not yet taken your pension) would that mean in effect you would pay zero tax as you wouldn't have gone over the minimum income tax threshold ?

Could you in effect use this method repeatedly to exhaust your AVC money, before doing anything at all with the rest of your pension until that AVC money was gone, meaning in effect you have withdrawn it all tax free ?

My mind is running overtime trying to think of how I could retire at 60 and not pay any tax lol.

[RobertT]

Isn't all of this dependant on whether or not you have "crystallised" your pension first ? If you haven't done so, doesn't it give you more flexibility ?

If you take your AVC's with your NRA60/65 benefits you will be crystallising them, so if you want more flexibility via drawdown for example, you have to transfer out to a provider that offers that flexibility. As you can't do that via your RM AVC arrangement.

For clarification first (and RobertT you may be able to confirm), the term crystallisation simply refers to whether you have taken 25% of the pension tax free ? I am not sure on the exact definition.

It generally refers to DC pensions of which AVC's are an example. Once you've taken the tax free cash and started drawing an income, via an annuity or drawdown, it means who've crystallised your pension.

However, I believe if the pension has not been crystallised, there is another option with the AVC's, or am I mistaken ? The other option I believe is called UFPLS, standing for Uncrystallised Funds Pension Lump Sum.

With this method, I understand you can withdraw amounts as often as you like (as long as the pension hasn't been crystallised), and pay tax on 75% of the withdrawal as opposed to 100% (at the prevailing tax rates as usual). I have quite a few queries with this method.

One is, if you withdrew £12,000 one year using this method, and that was the total income you had earned for that year (no other income whatsoever, say for example you had left Royal Mail but had not yet taken your pension) would that mean in effect you would pay zero tax as you wouldn't have gone over the minimum income tax threshold ?

Could you in effect use this method repeatedly to exhaust your AVC money, before doing anything at all with the rest of your pension until that AVC money was gone, meaning in effect you have withdrawn it all tax free ?

Yes, but it's really just a variation of drawdown.

With drawdown, you take up to 25% tax free upfront and then dip into the rest as and when you want, with that being classed as income and potentially taxed, depending on the amounts concerned.
With UFPLS, 25% of each withdrawal is tax free with the rest being classed as income.

Ignoring any variations in the value of the investments, the same amount of cash can be withdrawn tax free with both choices.
Take a £100k pot for example:

Drawdown - you take £25k as tax free cash and then withdraw an amount equal to the personal tax allowance(£12,500) each year for 6 years. As long as you have no other income, you'll have withdrawn it all in the space of 6 years totally tax free.

UFPLS - you take out £16,666 per year with the first £4,166 being tax free and again assuming no other income, you've taken it all tax free.

In both examples, you've withdrawn the £100k tax free over 6 years. But the only way you can do either option with your AVC's is to transfer them to another provider!

I have a personal pension which I intend to fund my early retirement at 55. I haven't decided which method I'll use, but I'll probably take the 25% lump sum upfront and put it into a 'dip in fund'. Therefore taking a basic income equal to the PTA to live on.
There should also be enough in there to supplement my NRA60/65 until state pension age by drawing it down without any tax liability. Although as I'm in my early 50's & I'm about 15 years until my SPA, it's hard to be sure.
My AVC's are on top!

My mind is running overtime trying to think of how I could retire at 60 and not pay any tax lol.

I know the feeling as I've been there too!

Although in my opinion you shouldn't get too bogged down in the zero tax issue. Concentrate on getting an income that's enough to live on fairly comfortably, if that means paying a bit of tax, it's not the end of the world.

[posteee]

Very useful information RobertT. Extremely useful to know.

I've left it all a little late really. I'm 44. Only got about £6500 in my AVC at the moment but paying £60 a week into in, and started paying £50 a week in around 18 months ago, and decided with each passing April I would increase that by £10 (So an increase of £10 per week per year until I cash it in whenever that may be) Had the bonus plan for a while but it's a piddly amount.

I've calculated that if I succeed for the next 11 years in continuing to do this, I will have paid in altogether a little over £70k altogether.

I know that in itself is nowhere near enough for an income, but it's a leg up. I've really little idea what the Royal Mail actual pension will be worth, but at a back of a fag packet calculation, over the same period, between Royal Mails contribution of 13% and ours of 6% I probably will have paid in around £55k over the same period.

Which in all gives me an extremely rough cash equivalent estimate valuation at age 55 of £125k. This doesn't include the defined benefit elements pre 2018. Mine are worth about £350 a month at age 65, so if I took that at 55, it would be roughly half that at £175 per month.

A 5% yield of £125k to last me until age 75 is £6250 a year, or £520 a month, or £695 a month if I took everything including pre 2018 benefits early. Which is rather paltry lol. Obviously state pension kicks in at 67 or 68 but that's a LONG way off.

Realistically I will have to work until age 60. Maybe later. Providing I am in good health though I'm not really fussed and would probably just be happy continuing to work.

However I am trying to plan for the worst whilst hoping for the best.

My eyes have been opened as to how much money we actually need to retire and it's no mean feat.

[RobertT]

There was someone on here a while back who said 'the best time to start saving towards your retirement is now', or words to that extent, and I would agree with that. But the earlier now is the better.
I first started paying into AVC's when I was 26, although I only really took it seriously from my early 30's.

Over the years I've paid in just short of £3k of my own money into Bonusplan, but with the small contribution from RM, tax relief, PSE and investment growth, my fund is currently worth over £15,500, although it was higher before the CV-19 market crash.
So although it's not a huge amount in the general scheme of things, it's been quite a good investment and a good example of how small acorns can grow.

I've put a lot more into Flexiplan and that forms the majority of my AVC's, but because I started early I've never had to max it out, as some do.

It's scary how much money you need to provide yourself with a decent standard of living in retirement, especially if you want to give up work before state pension age

There have been times I've thought if it was worth it and I'd be better off spending my money on exotic holidays. But my decision to save is probably going to knock 10 years off my working life, so I think it's been 100% worthwhile.

Good luck and keep the faith.

[posteee]

To be honest RobertT I just try to be as philosophical as possible about it as I can, whilst at the same time pragmatic as to my position.

As long as I'm financially stable it's a lot more than some. I may be able to increase the amounts I'm paying by more as time goes on. Will just see.

Grateful to be in a job and have a roof.

[Hawkey99]

The other thing to think about Postlee is the huge amount that certain AVC investments have made over the years.

I am in Shiariah Law which is 70% in USA and the rest spread throughout the world. I has done very well over the years.

Historially and thats all we can go by, equities have always done well in the long term. Global equities average over 8% a year including dividends.

How much should you pay in..........As much as possible.......

When is the best time to invest........Today.

Good Luck.

[posteee]

I agree.

The dip in equities has actually been quite good timing for me to increase my AVC from £50 to £60 per week. It wasn't planned that way. I had already planned to do it (as I mentioned to RobertT I will be increasing my investment by £10 per week per year in April from now on to align with pay increases).

I'm also in the Sharia Law fund. I invest 36% in the Growth fund, 16% in the Shariah Law fund, 16% in the Balanced fund, 16% in the Global Equities Fund, and 16% in the Cautious Fund. I don't think I will play around with that mix throughout. It gives me a good balance of stocks, bonds and gilts and spreads my risk, and can still gain when times are good but have some defensive areas with bonds and gilts for when times are bad too. Impossible to get it perfect but that's my best attempt with the funds we have to choose from.

I know usually the recommended approach is to go for high risk in early days and then gradually move money into bonds and cash etc, but I don't like the way that sounds. For me, it feels too much like trying to time the market and I'm all too aware that's nigh on impossible. So I've adapted it and adopted my own approach. I'm also buying 1 kg of physical silver per year too as a small hedge (only just started, doing that in January of each year).

I just wish I had started earlier and had more funds to play with. For now, that's all I can afford but things may improve when I've paid a few things off.

[heapsy]

To be honest RobertT I just try to be as philosophical as possible about it as I can, whilst at the same time pragmatic as to my position.

As long as I'm financially stable it's a lot more than some. I may be able to increase the amounts I'm paying by more as time goes on. Will just see.

Grateful to be in a job and have a roof.

If you decide to go at 60, you could use the AVCs like a pension. A bit each week / month. That way, you might not need to take the NRA65 pension early. This is my plan, along side money from savings and investments, I reckon in just over 7 years I'll have around £300 per week pension.

[posteee]

Heapsy, I suppose at age 60 I could indeed do that until I reached state pension age and then exhaust my AVC in approximately 8 years from age 60 to 68, and then take both my main Royal Mail Pension and state pension at the same time.

Definitely an idea, as, when and if I reach that age lol. Got 15 and a half years or so. But yes, it's definitely a feasible option.

[heapsy]

Heapsy, I suppose at age 60 I could indeed do that until I reached state pension age and then exhaust my AVC in approximately 8 years from age 60 to 68, and then take both my main Royal Mail Pension and state pension at the same time.

Definitely an idea, as, when and if I reach that age lol. Got 15 and a half years or so. But yes, it's definitely a feasible option.

I've been investing on the stock markets and paying AVCs. I intend to use a combination that suits me to avoid tax but still have enough to live on. I'm lucky in that I will inherit something from my parents. The trick is to ask yourself two questions, 1 when do you want to retire? 2 what sort of income do you want / need? Lots of people have wild ideas about their pension, but have no idea how to go about it. Mainly because they are not interested in the time and effort it takes. I've spent hours on the pc reading and also newspaper articles. Knowledge is everything. NO! I'm not Warren Buffett. I am better off for making the effort.

[RobertT]

Heapsy, I suppose at age 60 I could indeed do that until I reached state pension age and then exhaust my AVC in approximately 8 years from age 60 to 68, and then take both my main Royal Mail Pension and state pension at the same time.

Definitely an idea, as, when and if I reach that age lol. Got 15 and a half years or so. But yes, it's definitely a feasible option.

I think heapsy was suggesting you take your NRA60 and AVC's(as a tax free lump sum) at 60 and use the AVC's to top up your income until you take your NRA65 at 65 and then state pension. Which I suspect is basically what many people will do, including myself.

Remember that potentially all of your AVC cash will be tax free if you take it with your main NRA60/65 benefits.
If you work out the benefits you've already accrued as 75% of the total you're allowed. Then the other 25% can be made up from AVC's. For example:

Your main section C benefits equal a combined pension of £6k per year, meaning a pot value of £120k(using the 20x multiple).
If that equates to 75%, then you can build up another £40k in AVC's(& DBCBS) and take it tax free.

If you transfer out to another provider for drawdown or UFPLS, only 25% of that £40k is guaranteed to be tax free, with the remainder classed as income.

It's generally a bad idea to take any of your NRA60/65 benefits early, but it's a much worse idea, to defer them past NRA. Because you won't get anything extra for doing so – you'll just lose out on a significant amount of money!

Don't underestimate how quickly the time will go. It may seem a long way off but you'll be in your 50's before you know it and the planning you're doing now will put you in good stead for the future.

[heapsy]

RobertT, yes I was suggesting that, IF finances will facilitate. As you mentioned, taking a pension early is a bad idea, generally speaking. As I mentioned, many people don't want to put the time / effort into planning their pension. The way I see it is this, interest rates will remain low for some time to come. Possibly another decade or so. IF I have enough money to draw from cash, investments etc, I would rather do that and preserve my guaranteed RM pensions until the correct NRA. I will then receive larger cost of living increase in monetary terms. As I get older, I probably wont be going out as much, nor drinking as much. Therefore my expenditure will be more predictable. I think, and I have mentioned this before, too many people are looking at the big figure on their statement and thinking "I've put all that money into the pension". This is triggering the urge to take it as early as possible, in an attempt to get all their money out asap. As you and I know, the figures are calculated by actuaries, and are therefore not REAL money in the true sense of the word.

[posteee]

Trying to get my head around the ideas.

The problem I have is that I have only been working for Royal Mail for 15 years, and so my NRA60 valuation is very small. I doubt, if I carry on saving into the AVC's as I plan to that even a 20 times valuation of that particular pension pot would mean I could save much or any tax on my AVC by taking it all at the same time, because of my small NRA60 pot.

Potentially I could take the whole pension (NRA60 & NRA65) pots at 60, and then I suppose it would make the idea more feasible but would obviously lose about 25% of the NRA65 pension pot. ?

So, do the defined benefit pension pots have an actual "pot value" so to speak ? RobertT, you mention 20 times the annual pension benefit (if not taken early) would represent the pot value ? ? I can clearly see that the defined contribution pensions have pot values, but didn't realise for purposes of working out how much you can take 25% tax free, that the defined benefit pensions also have an actual pot value ?
Can either RobertT or Heapsy help me with that aspect ?

[RobertT]

In terms of working out the Lifetime Allowance(which isn't really anything to worry about as it's over £1million), and giving you an idea of how much lump sum you're entitled to, the 20x multiple is used to work out your 'pot value'.

It's mentioned on page 12 of your plan guide.
LTA info here.

You don't actually have a pot of money within the RM pension scheme with your name on it as such, as the pension you receive is based on your wages and length of membership in the scheme. But in theory there should be enough in the pot to pay for everyone's pension.

Although sometimes DB schemes buy bulk annuities for their members, which is a way of safeguarding the benefits paid out and the scheme as a whole.
A similar thing happened for Post Office members of the RMPP this year.

[posteee]

Ah. Very glad I asked.

I will get the calculator out when the next pension statement lands (when is this due btw please ?)

Ideally then, I need to ensure the total amount of money I put into the AVC's equates to exactly 25% of the total "pot", including the pre 2018 LTA's and the cash balance totals, all added together ?

Any extra is better going towards anything else ideally that is either an ISA or CGT free ?

RobertT, slightly confused as you mention paying more into your private pension as opposed to paying more into the AVC's but won't you still have to pay tax on that too in the same way ? And is that a SIPP Pension can I ask ?

Apologies, the more questions you answer, the more I seem to have.