AVC self-management choices ..

[peterboroughmatt]

If your under 40 get a Lifetime ISA, u can pay £4k in a year and the government will give u at 25% bonus.

[south London postie]

^^ A bit late for me but great info.

Yes. You don't get tax relief with ISAs on the way in. You get it tax free when you sell, or take the income from your investments. Most of my funds are UP by double digit %. One was 44% up when I checked the other day.
22% up across the entire portfolio. think it is worth looking at. I have £40k in total so far. Think about this. If you were retiring tomorrow, what would you do with your lump sum, in a period of very low interest rates for cash deposits?
I am also looking at it as paying myself off. That is, providing extra funds when I've finally had enough. hopefully in 8 years time at 60. Around £45k in AVCs on top. If I get a pay off from RM as well, then I will be quids in. I'm in delivery, and I just can't see myself doing 40 + years tbh.

Interesting. Thing for me is (a) I find it difficult to even begin to compare and (b) they so heavily incentivise the AVG thing it's difficult to not participate.

Having said that, I love the greater options available outside the scheme so if fate sorts me out with a little extra, this looks like the way to go. THanks

[heapsy]

^^ A bit late for me but great info.

Yes. You don't get tax relief with ISAs on the way in. You get it tax free when you sell, or take the income from your investments. Most of my funds are UP by double digit %. One was 44% up when I checked the other day.
22% up across the entire portfolio. think it is worth looking at. I have £40k in total so far. Think about this. If you were retiring tomorrow, what would you do with your lump sum, in a period of very low interest rates for cash deposits?
I am also looking at it as paying myself off. That is, providing extra funds when I've finally had enough. hopefully in 8 years time at 60. Around £45k in AVCs on top. If I get a pay off from RM as well, then I will be quids in. I'm in delivery, and I just can't see myself doing 40 + years tbh.

Interesting. Thing for me is (a) I find it difficult to even begin to compare and (b) they so heavily incentivise the AVG thing it's difficult to not participate.

Having said that, I love the greater options available outside the scheme so if fate sorts me out with a little extra, this looks like the way to go. THanks

Something else I forgot to mention. If you think of the £40k I have in my ISA. Imagine if that was £40k in a pension. Straight away you would only get £10k tax free. Then, using the standard formula of dividing by 20, the remaining £30k would give you a starting pension of only £1,500 per year, plus cost of living increases. It would take a while to get your £30k back. If ever. My theory is that as you get older you will have spent most if not all of your cash, by the time you are 75. Leaving the pension intact, adding AVCs, then an ISA, should give me enough, and help to avoid paying too much tax.

[RobertT]

From a tax point of view, personal pensions are by far the better route on the way in compared to ISA's, as long as you don't end up paying tax on it on the way out – which isn't inevitable!

Take the £40k heapsy mentioned. Let's say for ease of this example that you've had no investment growth on your money at all(highly unlikely I know).
The £40k in your ISA will have cost you £40k, while factoring in tax relief it will of only cost you £32k in a pension.

Let's say your NRA60 will pay out £7k at 60, and if that is your only income it means you've got £5,500 in left over personal tax allowance(based on current rate). Therefore you could take your 25% tax free cash from your pension(£10k) and drawdown £27,500 over the next 5 years, leaving the remainder for between 65 & 67 once you've taken your NRA65 and until the state pension kicks in.
Therefore you've taken the full £40k out tax free and it only cost you £32k(less including investment growth).

Having a larger amount in a personal pension could also enable you to retire before taking your RM benefits by using the same drawdown method, but obviously involves saving much more and/or from an younger age.

There is no 'standard formula' for working out annuity rates! A pot of £30k would give you a varying amount depending on your age and type of annuity you purchase(i.e single life/joint life/level/percentage escalation). They're based predominantly on interest rates, gilt yields and life expectancy.
The value of DB pensions are often worked out as a 20x multiple.

Personally I think the best way to go is:

1. Make the most of AVC's and the added benefit of PSE, ideally ending up with savings of no more than 25% of your total pot value. Any more could bring income tax into the equation.
2. Take advantage of any unused personal tax allowance you're likely to have in retirement to supplement your main RM pension benefits, as described above.
3. Use ISA's and other savings vehicles to supplement your income once you're personal tax allowance is used up.

In practice a lot will depend on personal circumstances which will obviously vary. But as both myself and heapsy have described – there is more than one way to skin a cat!

[heapsy]

Yes, but if you are single, there isn't much point in building up even more widows pension that will never be used. What I was trying to point out was the flexibility of the ISA. Especially as we have at least two different NRAs, and a third on the way.

[RobertT]

Yes, but if you are single, there isn't much point in building up even more widows pension that will never be used.

Sorry but what have widows pensions got to do with anything?
I was referring to using drawdown to access a personal pension tax free, so it's tax efficient on the way out as well as on the way in. Rather than using ISA's where the money goes in net of income tax.

If on the other hand you want to buy an annuity with your personal pension and have the security of an income for life, which some people might prefer, then if you're single(which I am too) you would obviously buy a single life annuity!

What I was trying to point out was the flexibility of the ISA. Especially as we have at least two different NRAs, and a third on the way.

Yes and I was trying to point out that a personal pension is the most cost effective way of using up any unused personal tax allowance you may have. Which would be particularly beneficial when you've taken your RM pension and your income is less than that figure. Or if you want to retire early.
If you don't use it, you'll lose it!

[south London postie]

Personally I think the best way to go is:

1. Make the most of AVC's and the added benefit of PSE, ideally ending up with savings of no more than 25% of your total pot value. Any more could bring income tax into the equation.
2. Take advantage of any unused personal tax allowance you're likely to have in retirement to supplement your main RM pension benefits, as described above.
3. Use ISA's and other savings vehicles to supplement your income once you're personal tax allowance is used up.

I'm not sure we get a tax free allowance in retirement, at least not in effect - as I understand it, the state pension counts as taxable income, so doesn't that eat up all of your tax free allowance?

[heapsy]

Personally I think the best way to go is:

1. Make the most of AVC's and the added benefit of PSE, ideally ending up with savings of no more than 25% of your total pot value. Any more could bring income tax into the equation.
2. Take advantage of any unused personal tax allowance you're likely to have in retirement to supplement your main RM pension benefits, as described above.
3. Use ISA's and other savings vehicles to supplement your income once you're personal tax allowance is used up.

I'm not sure we get a tax free allowance in retirement, at least not in effect - as I understand it, the state pension counts as taxable income, so doesn't that eat up all of your tax free allowance?

No. Currently we have a £12,500 per year tax allowance. This is likely to increase with time. Anything below that will be tax free., regardless of your work or retirement status.

[south London postie]

Question: does the state retirement pension count as income for the purpose of the (current) £12,500 personal tax allowance?

Answer: as I understand it, yes it does. In fact, it takes up the entire allowance.

[heapsy]

[quote="south London postie"]Question: does the state retirement pension count as income for the purpose of the (current) £12,500 personal tax allowance?

Answer: as I understand it, yes it does. In fact, it takes up the entire allowance.[/quoN

No it doesn't. The state pension is around £8,500. The tax allowance is as I said earlier, £12,500 and will rise before most of us get our pensions. Therefore, only your annual income over the tax free allowance would be taxed.

[RobertT]

Personally I think the best way to go is:

1. Make the most of AVC's and the added benefit of PSE, ideally ending up with savings of no more than 25% of your total pot value. Any more could bring income tax into the equation.
2. Take advantage of any unused personal tax allowance you're likely to have in retirement to supplement your main RM pension benefits, as described above.
3. Use ISA's and other savings vehicles to supplement your income once you're personal tax allowance is used up.

I'm not sure we get a tax free allowance in retirement, at least not in effect - as I understand it, the state pension counts as taxable income, so doesn't that eat up all of your tax free allowance?

Anyone with a reasonable amount of RM NRA60 & NRA65 pension will likely pay tax on their retirement income, when also factoring in the state pension.
The current rate of the new state pension is £168.60 per week or £8,767.20 per year. But the actual amount you get will vary depending on your individual work / National Insurance history.
Some people might get more or less than that figure!

If you don't know what yours is likely to be, get yourself a forecast: https://www.gov.uk/check-state-pension" onclick="window.open(this.href);return false;

The current personal tax allowance is £12,500 per year, so anything over that will be taxed.

The rate of the state pension and personal tax allowance usually increase each year, but it's the government that decides by how much.
Your RM pension will also increase each year.

My post up-thread about maximising your personal tax allowance, was referring more to before state pension age.

[south London postie]

Question: does the state retirement pension count as income for the purpose of the (current) £12,500 personal tax allowance?

Answer: as I understand it, yes it does. In fact, it takes up the entire allowance.[/quoN

No it doesn't. The state pension is around £8,500. The tax allowance is as I said earlier, £12,500 and will rise before most of us get our pensions. Therefore, only your annual income over the tax free allowance would be taxed.

Good point. Understood!