Avoiding Higher Tax on AVC

[Hawkey99]

Can someone help with my enquiry please. Basically it’s for my wife who is trying to avoid paying higher rate tax.

She is 57 years old and currently earns approx 17k per year gross and will continue to do so until approx 70 years old.

She intends to take both of her Royal Mail pensions at their due dates. Her Combined NRA 60 is £3535 per annum and her combined NRA 65 is £3545 per annum.

She has Approx £75,000 in an AVC.

So the question is due to the higher amount of AVC would she be better off moving this to another provider or will she have to pay normal rate tax if she leave it where its to and takes her pensions when they are due.

Many thanks for any help...

[RobertT]

It sounds as if I'm in a fairly similar position. I plan to do option 1 below!

AVC's are designed to fund the tax free lump sum, so you don't have to give up as much, or any pension to get one. Particularly useful for section C members.

We now have the DBCBS to do that with NRA65, but AVC's are ideal for NRA60.

Her NRA60 value is about £70,700(3,535 x 20). That is 75% of the total NRA60 value, therefore the max tax free lump sum from AVC's is about £23,500.

She could take the remaining £51,500 with NRA60 or leave it until NRA65, with the first 25% of that excess also being tax free. But higher rate tax would probably be payable on some of that.
Currently any earnings over £50,270 attracts 40% tax.

There are 3 potential ways to avoid that higher rate:

1. Use the AVC's to fund the tax free cash at 60, then transfer the remainder into a personal pension. She can then drawdown the remainder over time, making sure total income is within the 20% tax band.

2. Transfer the whole £75k into a personal pension. Then withdraw 25% tax free and drawdown the remainder over time, making sure total income is within the 20% tax band.

3. Buy an annuity with either the full £75k or the £51k(after taking lump sum with NRA60).

*Transfers of AVC's would need to be independent of taking NRA60/65 benefits.

[NorthernBoy]

Hawkey, that’s a high amount of AVCs, how many years has she done to get those figures.

Is there an option to convert avcs to annual pension.

[Hawkey99]

She was a manager for a while after being a postie.

No there isnt an option to convert to pension.

Thanks for your help Robert. greatly appreciated....

[RobertT]

There is no option to convert AVC's directly to more RM pension, other than if there is an excess amount of £1,000 or less, once the tax free lump sum has been paid.
That <£1,000 can be commuted to more pension!

Otherwise, if you want more guaranteed income, it's case of going the annuity route.

Although there will be some who've paid into Addplan, which buys more years and so more pension.

[Hawkey99]

Can you explain the sum how you got to the £23,500 tax free AVC amount please.

[RobertT]

You first need to work out the pot value of your NRA60 benefits. To do that it's the usual 20x multiple. So in your wife's case, it's:

£3,535 x 20 = £70,700.

The maximum tax free amount you can take is 25% of the 'total' NRA60 pot value. Therefore, the £70,700 is effectively 75% of that total value, meaning the other 25% is the maximum tax free amount.

To get that 25% maximum tax free amount, all you need to do is divide the £70,700 by 3, giving you £23,566.
That makes a total NRA60 pot value, for tax free cash purposes, of £94,264.

In practice some of the DBCBS can be taken with NRA60, so if that option is chosen, the amount of AVC's you can use to fund the tax free cash will be less.

I hope that makes sense.

[NorthernBoy]

Rob, if you take your NRA 60 and 65 at same time can you work out your 25% tax free value on the combined pension of the 2?

[Hawkey99]

So out of her £75,000 AVC pot she would use £23,556 to give her the lump sum.

This leaves her with £51444

Could she then do the same with her NRA 65 (same sort of value) and get another £23556.

This would leave £27888 which is taxable at 20%.

Is that possible?

[RobertT]

Rob, if you take your NRA 60 and 65 at same time can you work out your 25% tax free value on the combined pension of the 2?

You'll need to work them out separately and then add them together.

[RobertT]

So out of her £75,000 AVC pot she would use £23,556 to give her the lump sum.

This leaves her with £51444

Could she then do the same with her NRA 65 (same sort of value) and get another £23556.

This would leave £27888 which is taxable at 20%.

Is that possible?

In theory, it's possible. But does she also have the DBCBS?
That will usually be used to fund the tax free cash with NRA65! Or if it's not used you'll just pay tax on it, as you would with the AVC's.

You also need to factor in all income in a financial year to work out how much will be taxable.
In your wife's case, she'll potentially have:
Wages, 2 lots of RM pension & a taxable lump sum.

[Hawkey99]

So with approx 17K wages, £3.5k NRA 60 if she takes it just before her NRA 65 is payable it should mostly work.

Excluding any inflation etc etc ?

[Hawkey99]

DBCBS is worth 2.5k in total.

[RobertT]

DBCBS is worth 2.5k in total.

That's not much considering the scheme's been in place for the best part of 5 years.

[Hawkey99]

She left RM at beginning of scheme...