Paying into AVCs when going over 25% Tax Free amount

[RobertT]

Ah. Very glad I asked.

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

We should be getting 2 this year, one from the RMSPS and one from the RMPP. They seem to be coming later each year, 2019's came in October if I remember correctly. It's probably a case of we'll get them when we get them.

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 ?

From a tax point of view, a combined AVC & DBCBS pot of 25% would make sense, as anything over that would be classed as income an potentially taxed under normal PAYE rules.

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

Generally, pensions are better than any other form of saving because of the tax breaks on the way in, and as long as you avoid paying tax on the way out, then they should really be your first choice, in my opinion.
But there are withdrawal rules you have to abide by to get the full benefit - see the example I gave in a previous post about drawdown/UFPLS, and this link for more info.

An ISA enables you to take the money out tax free without any limits, but the money you put it will have come out of your net earnings, so you'll have already paid tax on it. So overall they're not as tax efficient.

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 ?

I already have enough in my AVC's to fund the 25% tax free lump sums when I take my NRA60 & NRA65 pensions, infact I have more than 25% and will end up paying some tax. So if I carry on paying into the AVC's, I'll just give more of it to the taxman.

Therefore I have a personal pension which I aim to drawdown to enable retirement before I take my NRA60 and to supplement my NRA60 & 65 up to state pension age at 67(assuming it doesn't increase again). The aim is that I won't pay much, if any, tax on the personal pension. For example:

At 57 I might have £60,000 in my pp. I take 25% tax free cash(£15k) up front, leaving £45k to drawdown. I can also take the equivalent to the personal tax allowance(currently £12,500) out per year tax free, assuming no other income. So between 57 and 60 I can withdraw £52,500 in total tax free.

As my NRA60 will pay out less than the personal tax allowance, I can continue drawing down the remaining £7,500 tax free, still assuming no other income. Plus I'll also have my AVC's which I plan to take in 2 batches – 1 at 60 which will be tax free and the rest at 65, which I will pay some tax on.
Therefore I can take all of the pp and most of the AVC's tax free.

So the reason I suggest AVC's are the better choice, assuming you have no other pension provision from previous jobs, etc, is because as long as you stick to the 25% of pot value tax free limit, they don't count towards your income for tax purposes. You just take your tax free AVC cash with your NRA60/65 benefits, put it in a savings account of some sort and dip into it as and when you choose.

If you transfer your AVC cash to a pp for drawdown, 75% of it potentially becomes income and is potentially taxable, depending on any other income you may have.
It's more a case of AVC's first to take advantage of their tax free status, then personal pension afterwards to mop up any unused personal tax allowance when you've taken your NRA60/65, and if you manage to save enough, to enable retirement before taking your NRA60/65.

I haven't got a Self Invested Personal Pension(SIPP), mine is just a Personal Pension. They're basically the same, except a SIPP tends to have more investment choices.

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

No problem. A lot of people don't understand pensions, but the important thing to understand is that everyone's circumstances are different, and what's right for one isn't necessarily right for someone else. You just need to find what's right for you.

[posteee]

RobertT, first I want to thank you for all your assistance recently.

I find it difficult to take in all the information at first, and have had to re-read the posts a couple of times, hence my delay.
In an earlier part of this conversation, when discussing tax on AVC's you said (I quote)

"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!"

My question is, if I manage to save £100k into my AVC's as per your example, and then I transfer this money to another provider for drawdown - does that mean I can defer the entirety of the rest of my pension, that being NRA60, NRA 65, the interim cash balance scheme, AND the new CDC scheme until the relevant retirement ages or for as long as I wish up until the age of 75 ?

It may be that, if this is a possibility, I decide to start to withdraw my AVC's as a drawdown very gradually even if I am working as a substitution for overtime over a longer period of time (paying the relevant tax of course).

And also if I did withdraw JUST my AVC's via this method of drawdown - would this automatically mean I have to take 25% of my overall pension pot tax free at that same time, therefore meaning it is crystallised, . . . or can that element be deferred (so that I can still claim my 25% tax free from the rest of my pension at my time of choosing).

One of the main reasons I ask, is my initial intention was to keep increasing my AVC contributions for an indefinite period each year but if I do that for too long, I will almost certainly take them over my 25% allotted allowance and so just want to consider alternative exit strategies should this occur.

Also RobertT, can I still pay into AVC's while drawing them down, or when you start to draw them down does it mean you can no longer take advantage of them ?

I realise actually, that much of this may become mute reasoning, as I read in another thread of yours that possibly AVC's MAY stop once the CDC pension begins, although obviously I appreciate that's just conjecture.

Hope this all makes sense.

Many, many thanks again.

[RobertT]

Technically you could choose not to take your RM pensions at NRA, but why would you want to?
If you take them before NRA they will be reduced for early payment, but if you defer them you won't get any extra for doing so.
For example: Your NRA60 is worth £5k per year and you don't take it until 65, you will lose £25k!

If you transfer your AVC's to another provider it has to be done as a separate transaction to taking your NRA60/65 benefits. So you would then have 2 completely separate pots. 25% of your transferred pot would be tax free and you can still take 25% of your RM pension 'pot' tax free too.

If you transfer your AVC's and then commence drawdown, I believe you can still carry on paying into that personal pension pot. Although it might be worth checking with a few providers to make sure.

[posteee]

And since the NRA60, NRA65, and the CDC plans all have different retirement ages, does that 25% rule apply to them also. So if each is taken at different times, 25% can be taken tax free. How does the interim cash balance plan align with that ? Does that have a specific age for withdrawal, 67, same as the CDC ? Are we able to take that early for a discount too ?

Thanks again.

[RobertT]

If you're NRA60 is worth £5k per year for example, then you have an NRA60 pot of £100k and you can take £25k lump sum.

The same applies to the NRA65, except the DBCBS is 'attached' predominantly to the benefits accrued from 2012-2018 and is used to provide the tax free cash associated with those benefits. The DBCBS has an NRA of 65.

If taking AVC cash with NRA60/65 benefits, that money would also have to be factored in and that is likely to be the best way to access that cash from a tax point of view, for most people.

As the RMPP is responsible for paying some of the inflationary increases associated with pre 2012 benefits, some DBCBS cash may be paid out with that too. Based on posts on these forums that is not likely to be more than a few hundred pounds.
There has been discussion on here about whether the DBCBS is reduced if taken early or not and nobody seems to know for sure. But if you're in sections A, B or C then it has to be used to provide tax free cash when taking your main benefits and can't be transferred out afaik.

The CDC scheme will be completely separate from existing benefits via NRA60/65/DBCBS, and it will provide a lump sum as part of the arrangement, via the Defined Benefit Lump Sum Scheme. Details: https://www.myroyalmail.com/pensions" onclick="window.open(this.href);return false;