Which is better for a lump sum, an AVC or an ISA?

[casp21]

I want to invest £30k from my upcoming VR and don't know which would be better. Putting it into an ISA (£15k each for hubby and me due to maximum allowances) or the whole lot into my pension via an AVC. I'm not sure about the way tax works regarding putting money into my Royal Mail pension (AVC). Is there tax relief etc, I am a basic rate tax payer but the VR would make me a higher rate tax payer for one year. Does anyone know which would be better in the long run for maybe the next seven years. An ISA or an AVC? Thanks. I am 51.

[RobertT]

It will a very personal choice based on your individual circumstances but here’s a few things to consider:

The first £30,000 of your VR money is tax free and doesn’t count towards your income for the tax year, so it’s just the amount over that is taxable.

AVC’s tend to be linked to the main pension scheme, so you may not be able to touch it until you take the benefits from your RM pension. Although that could be changing in April due to new rules coming in then – we still don’t know the finer details of how they will affect AVC’s with RM.

Alternately you could put it in a personal, stakeholder or SIPP pension which would allow you to access the money from 55 and benefit from tax relief too.

Cash ISA’s offer poor interest rates in general so you would need to shop around and potentially transfer fairly regularly to make sure you stay on a high rate.

S&S ISA’s will generally invest in the stock market(as will pensions/avc’s) although it will depend on the particular fund or funds you invest your money in.

Stock markets are very high at the moment based on historical figures, and investing a large amount of money in one go could be a risky thing to do at this time.

Do you have to put all the money in one place? Perhaps you could spread your money around instead.

[casp21]

Thanks for the reply Robert. This money is after the first £30k which i know is tax free. It is part of the remainder of my VR which I want to put away in a lump sum. I know that if I receive the money to try to put it in various different ISA's, bonds, shares etc it will be taxed at 40% first due to it bringing over the higher rate threshold for my earnings for the year (added to the remainder of my VR package also). That's why putting it into an IVA I will get tax relief and not have to pay the 40% tax, although I don't know how this works?

[casp21]

Sorry that should read AVC and not IVA, silly me.