Paying into AVCs when going over 25% Tax Free amount

[Hawkey99]

I am currently in a position where my AVC total is already going to take me over my 25% tax free amount.

When I retire I therefore understand that I will have an amount of income tax to pay on the surplus amount..

My future income when I retire will take me over the £12,500 tax allowance so paying the tax on this seems unavoidable.

My question is.....Is it still worth continuing to pay into AVCs ?

My logic is I still make a 12% profit on not having to pay N.I. plus any growth (if there is any) .

Does this make sense to do ?

Many thanks

[RobertT]

I'm in a similar position and personally I decided to stop paying into Flexiplan and divert my savings into my personal pension instead. Which I intend to use to fund early retirement before I take the first element of my RM pension at 60.

Although I'll be missing out on the benefits of PSE, the way I see things is that I would end up paying 40% income tax on some of the excess AVC cash had I continued to pay in, and the idea of retiring early is more attractive than having a bigger taxable lump sum at 60 and/or 65.
I plan to drawdown my personal pension and should only pay a very small amount of tax, and possibly none at all.

I know I always say this, but it'll come down to individual circumstances, but for me there was no logical or practical reason to continue paying into Flexiplan.

From what you say, it may be different for you and that extra 12% maybe of benefit as long as you don't end up paying 40% tax on any excess AVC cash further down the line.

A while ago I contacted the PSC and enquired about my options in my situation, and they told me that any decision to stop paying into Bonusplan would mean forfeiting my membership of the RMPP and therefore would no longer be able to pay into the DBCBS.
So I am still paying my £2.88 gross into Bonusplan!

[Hawkey99]

Thanks Robert,

My plan is to take the Pension and AVC very early in the financial year and therefore there ihopefully not going near the 40% Tax.

If for example my pension is £15k per year it will still leave me £35K of excess AVC money after my AVC tax free lump sum. Is that correct ?

Thanks

[RobertT]

Yes!

[streets97]

How much do you need 8n the AVC to take you over the 25% tax free amount. I have a reasonable amount in mine

[RobertT]

How much do you need 8n the AVC to take you over the 25% tax free amount. I have a reasonable amount in mine

First work out your total pot value:

Pension(inc, section C supplement) x 20 + lump sum(section A/B) + DBCBS + AVC's

You can take 25% of your total pot value as tax free cash.

[Hawkey99]

Re The tax free part of your lump sum.

I assume the tax free lump sum would not in any way be included in your income for that year.

As an example

£15k Pension

£70 total lump sum which 35K in this example is tax free lump sum.

Therefore your taxable income for that year would be £15k pension plus £35k (after tax free amount).

Thus gives you a taxable amount of 50k so all payable at 20%.?

[RobertT]

Yes that's correct! The tax free amount doesn't count towards your income.

But there are other possible incomes that might need to be considered to find out your overall tax liability, whether you're retired or still working. Such as:

Wages from RM or any other employment.
Voluntary redundancy payments over £30,000.
PILON payments.
Interest from savings accounts: https://www.gov.uk/apply-tax-free-interest-on-savings" onclick="window.open(this.href);return false;.
Dividend income: https://www.gov.uk/tax-on-dividends" onclick="window.open(this.href);return false;.

And I'm sure there's a few more!

In practice, most people won't be affected by any of the above, but it's always good to touch an extra base or two.

[Hawkey99]

Thank you Robert,

Really helpful and appreciated as always.

[posteee]

Isn't is the case though, that you don't have to take all of the AVC as a lump sum anyway ?

So isn't that a way to limit the amount of tax you pay, and you can take less as a lump sum so that it doesn't take you over the 25% ?

And is this the case, irrelevant of where your AVC's are ? For example if you have 4 or 5 pots in different places ?

[RobertT]

Isn't is the case though, that you don't have to take all of the AVC as a lump sum anyway ?

The normal use of AVC's is to fund the tax free cash when taking your NRA60 & NRA65 benefits. Anything over 25% of your NRA60 pot value, can be deferred to take with your NRA65. If there's still an excess amount, you either pay tax or convert to an annuity, assuming it's over £1,000. If it's under £1,000 you can convert it to more RM pension.

Or you can take up to 25% of your AVC monies as tax free cash and convert the rest to an annuity.

Or transfer out to a personal pension for other options, such as drawdown.

So isn't that a way to limit the amount of tax you pay, and you can take less as a lump sum so that it doesn't take you over the 25% ?

Whatever you do, after you've taken the 25% tax free cash, the rest will count as income and potentially taxed under PAYE rules.

And is this the case, irrelevant of where your AVC's are ? For example if you have 4 or 5 pots in different places ?

You can invest in various funds via AVC's, but you can only have 2 pots - Flexiplan and Bonusplan.

[posteee]

Thanks.
I'm a long way from it (at least 11 years anyway as I'm 44), but paying quite a bit into the AVC's Flexiplan via Scottish Widows/Zurich (tiny bit into Bonusplan).

I suppose a lot could change to the rules in 10, 15 or 20 years.

My long term plan though is to pay as little as tax as possible. I certainly don't like the idea of annuities though. I have children so if the worst should happen I would want money to go to them and not to a fat cat insurance company. The drawdown option to me appears possibly the most attractive - that way I could calculate each year how much I could withdraw to keep me under the income tax threshold (if I am fortunate enough to keep saving enough to take my income over it of course, which is certainly by no means guaranteed). Maybe spend or withdraw as much as possible between age 60 & 67, so when state pension kicks it (probably 68 for me actually), I already have most of the AVC withdrawn in intervals tax free ? That's the kind of idea I have in mind anyway.

But to drawdown currently you say it would need transferring elsewhere. No doubt doing that would incur a charge of some kind. Wouldn't it be possible just to leave it and draw down gradually from where it already is ?

[RobertT]

Thanks.
I'm a long way from it (at least 11 years anyway as I'm 44), but paying quite a bit into the AVC's Flexiplan via Scottish Widows/Zurich (tiny bit into Bonusplan).

I suppose a lot could change to the rules in 10, 15 or 20 years.

My long term plan though is to pay as little as tax as possible. I certainly don't like the idea of annuities though. I have children so if the worst should happen I would want money to go to them and not to a fat cat insurance company. The drawdown option to me appears possibly the most attractive - that way I could calculate each year how much I could withdraw to keep me under the income tax threshold (if I am fortunate enough to keep saving enough to take my income over it of course, which is certainly by no means guaranteed). Maybe spend or withdraw as much as possible between age 60 & 67, so when state pension kicks it (probably 68 for me actually), I already have most of the AVC withdrawn in intervals tax free ? That's the kind of idea I have in mind anyway.

But to drawdown currently you say it would need transferring elsewhere. No doubt doing that would incur a charge of some kind. Wouldn't it be possible just to leave it and draw down gradually from where it already is ?

It's not currently possible to do that I'm afraid, you have to transfer it to another provider that provides drawdown.!
Nor is it possible to transfer any excess AVC cash for drawdown after you've taken your NRA60/65 benefits including the 25% tax free cash. You have to either take a taxable lump sum or buy an annuity(assuming it's over £1k).

Personally I've looked into the possibility of transferring my AVC's for drawdown. But it worked out I'll pay about £16k more in tax than if I take it as tax free cash with my NRA60 & NRA65 benefits and the rest as a taxable lump sum. Although I do have a personal pension aswell that I'm going to drawdown, which will keep my income at the personal tax allowance level, with the tax free cash from the pp and AVC's on top.

In a way I'm a victim of my own savings habit and have accrued a bit too much from a tax point of view. But I'll still make a good 'profit' after the tax breaks and investment growth is factored in, and I'll still be better off than if I had exactly 25% of total pot value in AVC's.

It's going to enable me to retire earlier than I would have done otherwise, so overall it's a good thing as far as I'm concerned.

I have absolutely no intention of buying an annuity with either my pp or AVC's, as they're such poor value for money!

[rks]

" It's not currently possible to do that I'm afraid, you have to transfer it to another provider that provides drawdown"

Robert, as you say you have to transfer to another providerwho offers drawdown, I have been in touch with a few who do provide this and other options min amount has to be 10k I was told.
Is there any paperwork to suggest that this drawdown is not allowed though by RM through another provider Thanks?

[RobertT]

Yes, the guide to AVC's!

Page 7:

When taking their main RMPP benefits, most people use all of the money in their AVC account to provide a larger cash sum (subject to certain HMRC limits). Alternatively, you could use some or all of your AVC account to buy an annuity (a pension) which will provide an income for life.

You also have the option to transfer the value of your AVC account to another provider who may be able to offer you different choices. Note that RMPP does not allow the full range of pensions flexibilities, so you may not necessarily be able to take all your AVC account as cash, or be able to take income drawdown from your AVC account. You may, therefore, have to transfer to another provider if you want greater flexibility.

Page 9:

If you take your main RMPP benefits you have a number of choices. The most common option is to take all of your AVC account as a tax-free cash sum (subject to certain HMRC limits). Alternatively, you may:

• Delay taking your AVC account (in certain circumstances); or
• Take your AVC account before your main RMPP benefits; or
• Convert all or part of the value of your AVC fund into an annuity (an income for the rest of your life – a pension); or
• Transfer the value of your AVC account to another provider who may be able to offer you different choices.

Also page 9:

Note that RMPP does not allow the full range of pensions flexibilities, so you may not necessarily be able to take all your AVC account as cash, or be able to take income drawdown from your AVC account. You may, therefore, have to transfer to another provider if you want greater flexibility.


I also contacted the PSC in Sheffield a while back and asked them about drawdown, and have a written reply from them basically saying the same as above.

£10k is probably about right for most providers, although it's quite a small amount in pension terms.