AVC Clarification

[Hawkey99]

So to help a numpty.

You can continue paying into the Flexiplan AVC in the new scheme but the money will be added to your DC pension pot. Does this mean you won't be able to use money you paid into your AVC after 2018 to fund a lump sum ??

Thanks

[BeamishStout]

So to help a numpty.

You can continue paying into the Flexiplan AVC in the new scheme but the money will be added to your DC pension pot. Does this mean you won't be able to use money you paid into your AVC after 2018 to fund a lump sum ??

Thanks

As far as I know the lump sum would be any amount from a DC scheme pension pot (inc AVCs) but only 25% of it would be tax-free the rest being taxed at your marginal rate. That is what I understand it to be.

[RobertT]

Under RM’s proposals we can continue to pay AVC’s as we do now until 2018. From then no more money will be allowed to go into those particular funds. But the money you’ve built up in them can still be used to fund your tax free lump sum from your total RMPP(pre 2018) pot, exactly as it is now.

The current normal retirement ages for the RMPP will remain in place. So NRA60 relates to service up to 2010, and NRA65 relates from 2010 to 2018. Any reductions for early payment will still apply.

From 2018 onwards your Flexiplan payments will continue, unless you tell them to stop them, but will be redirected into the new DC pension instead alongside the standard contributions from both you & RM. I assume we will also be able to increase or decrease those extra payments as we can now, although I don’t think that’s mentioned anywhere in the documentation. You will be able to take a maximum 25% tax free lump sum from this total DC pot, with the rest being classed as income and potentially taxed at your marginal rate. You will also have the choice as to whether to buy an annuity or drawdown your pot.

The new DC pension is a completely separate entity and will not have a normal retirement age other that the legal minimum, which is currently 55. So it can be accessed totally independently from the RMPP if you wish.

[Hawkey99]

Thanks rob,

So I guess its sensible to put as much into the old scheme as you can until 2018 and the hope for the best that the new scheme produces the good.

I am hoping to retire in about 3 years so whereas I will get all of my of the money I have paid into my current AVCs (as the amount is to less than 25% of my total pension pot) as a tax free lump sum, with the new scheme if Im only in it for 3 years I assume the AVC payments will be just added to my regular payments and I get 25% of this total tax free and the rest is just a new pension with the usual tax paid.

Thanks again for your help.

[RobertT]

Yes, it makes sense to put in as much into AVC’s until 2018 to benefit from as much tax free cash from them as you can.

When you come to take your DC pension you will have 4 choices:

a. Take your whole pot in one go with 25% being tax free and the rest treated as income.
b. Take lump sums on an ad-hoc basis with 25% of each being tax free and the rest treated as income.
c. Take 25% of the total tax free and then take ad-hoc lump sums which are treated as income.
d. Take 25% tax free and buy an annuity with the rest, which would also be treated as income.

There's lots more info here: https://www.moneyadviceservice.org.uk/e ... ension-pot" onclick="window.open(this.href);return false;

Bear in mind that currently the first £11k of income, rising to £11.5K from this April is tax free. But that allowance includes your total income, so it will include all pensions including the state pension and any wages you have in the relevant tax year/s. So with a little planning, you may be able to take all of your DC pot tax free.

[Hawkey99]

"So with a little planning, you may be able to take all of your DC pot tax free."

Hi Robert, Can you put a bit more meat on the bones with your comment above.

I expect my pension to be over the 11.5 grand of income so how would this work ??

Thanks

[RobertT]

"So with a little planning, you may be able to take all of your DC pot tax free."
Hi Robert, Can you put a bit more meat on the bones with your comment above.
I expect my pension to be over the 11.5 grand of income so how would this work ??
Thanks

It’s always going to come down to individual circumstances to one degree or another. But let’s say for example, you have enough pension savings from 60 to provide enough to retire on from then onwards. And you only pay into the new DC scheme for a few years and at age 59 you have £15k in your pot.

You can take 25% of that tax free, leaving £11,250. If you have no other income in that particular tax year then that will also be tax free. So in effect all of your £15k is free from any tax, and you’ve probably enabled yourself to retire a year earlier than you would have otherwise.

If you were to buy an annuity at 60 with your £15k you’ll only get about £650 per year based on a single life level annuity. Or a starting amount of about £400 if you want inflation proofing & spouses benefits. And you may also have to pay tax on it depending on your other income. Although it would obviously be payable for life.

Another option might be to use your DC pot to subsidise your RMPP from 60 to state pension age, or perhaps to retire completely at 55. A lot will depend on what it’s worth and what else you’ve got towards funding your retirement.

The choice with a DC pension is either a very low income for life particularly if you buy an annuity at a relatively young age. Or you have the ability to manage that money yourself and use it in a more flexible way.

[Hawkey99]

" It’s always going to come down to individual circumstances to one degree or another. But let’s say for example, you have enough pension savings from 60 to provide enough to retire on from then onwards. And you only pay into the new DC scheme for a few years and at age 59 you have £15k in your pot.

You can take 25% of that tax free, leaving £11,250. If you have no other income in that particular tax year then that will also be tax free. So in effect all of your £15k is free from any tax, and you’ve probably enabled yourself to retire a year earlier than you would have otherwise.

If you were to buy an annuity at 60 with your £15k you’ll only get about £650 per year based on a single life level annuity. Or a starting amount of about £400 if you want inflation proofing & spouses benefits. And you may also have to pay tax on it depending on your other income. Although it would obviously be payable for life.

Another option might be to use your DC pot to subsidise your RMPP from 60 to state pension age, or perhaps to retire completely at 55. A lot will depend on what it’s worth and what else you’ve got towards funding your retirement.

The choice with a DC pension is either a very low income for life particularly if you buy an annuity at a relatively young age. Or you have the ability to manage that money yourself and use it in a more flexible way."

So in the example above could you take the whole of your new DC pension (assuming 15k as example) in your first year of retirement if 59 and avoid paying any tax on it and leave your other 2 pension until your are 60 or 65 ? Is my understanding correct ?

Many Thanks

[RobertT]

"So in the example above could you take the whole of your new DC pension (assuming 15k as example) in your first year of retirement if 59 and avoid paying any tax on it and leave your other 2 pension until your are 60 or 65 ? Is my understanding correct ?
Many Thanks

Yes, you can take the new DC anytime after 55 totally separately from either your NRA60 or NRA65 if you want to. If retiring, the best time to take it would probably be just after the start of a tax year. In practice you may pay tax initially but you can reclaim that back off HMRC. This gives more info: https://www.gov.uk/claim-tax-refund/you-get-a-pension" onclick="window.open(this.href);return false;

Also bear in mind that the government has announced plans to increase the personal tax allowance to £12,500 by 2020.

For anybody receiving an income of less than the personal allowance, you could also save yourself a bit of tax by transferring some of that allowance over to your husband or wife, if their income is higher than yours. Info: https://www.gov.uk/marriage-allowance" onclick="window.open(this.href);return false;