AVCs...Shariah or Growth best investment in 2021 ?

[RobertT]

As a follow on from my previous post.
Let's say 2 people are saving £100 per month for 10 years meaning a total of £12,000, with an annual growth rate of 5%.*

That amount going into an equity ISA would mean a total of £15,499 after 10 years.

But the same amount going into a personal pension would mean a total of £19,374 after 10 years, assuming the same investments as the ISA. Because every £100 contribution benefits from another £25 off the tax man.

As always it will depend on circumstances, but with 25% of the pension being automatically tax free, if you can drawdown the remainder tax free too, then in my example, why would you turn your back on nearly £4k?

If you're likely to have a pension income of less than the personal tax allowance, you'd be wise to take advantage of that difference if possible.
If you don't use it, you'll lose it!
it might just enable you to retire a bit earlier too!

In practice, how you access your money is just as important as saving it in the first place!


*Figures are based on a steady annual growth rate, in practice the ups and downs of the stock market will vary. Charges are not included.

[GW]

As we are discussing AVCs & drawdown etc can someone confirm that my understanding is correct and that when you come to take your NRA65 benefits you can also transfer any AVC funds into a more flexible pension that will allow you to take 25% tax free as a lump sum and then drawdown the rest as you need to?

With the introduction of the new Cash Balance scheme from April 2018 I will use up my 25% tax free allowance on my NRA65 benefits from that and want if possible to take as much as possible my AVC pot tax free.

[RobertT]

As we are discussing AVCs & drawdown etc can someone confirm that my understanding is correct and that when you come to take your NRA65 benefits you can also transfer any AVC funds into a more flexible pension that will allow you to take 25% tax free as a lump sum and then drawdown the rest as you need to?

With the introduction of the new Cash Balance scheme from April 2018 I will use up my 25% tax free allowance on my NRA65 benefits from that and want if possible to take as much as possible my AVC pot tax free.

In your situation you have two options with your AVC's:

1. Use them along with your NRA65 benefits and DBCBS which will increase the size of your overall pot and mean a bigger lump sum. With any excess I think being paid out as a Uncrystalised Funds Pension Lump Sum(UFPLS), where the first 25% is also tax free and the remainder classed as income and potentially taxed.

2. Transfer out as a separate transaction to taking your NRA65 benefits. Meaning you can subsequently take 25% tax free with the remainder classed as income and potentially taxed.

A determining factor between the two will be what your income is in relation to the Personal Tax Allowance(currently £12,500).

If you transfer and your income is already equal or above that amount, you'll end up paying tax on all of the other 75%, whether you access it all at once or over a period of time.
But you might end up paying tax on a smaller proportion if you take it with your NRA65 benefits.

Although I'm still in my early 50's I expect to be in in a similar position to you when taking my NRA65. I've done my maths and will pay less tax if I go with option 1.
But obviously it'll depend on your own circumstances.

[GW]

Thanks Robert.

I assume that the main difference between the 2 options are the amounts involved.

For option 1 the greater the AVC the more likely that you willl have to pay tax at a higher rate as it will all be taken in a single tax year whereas for option 2 you can spread it out over several years and pay tax at a lower rate.

Rough figures in my circumstances are as follows :-

NRA65 pension £4000 pa
section B lump sum £12000
DBCBS £25500
AVCs £46000

My other income will be £9300 from existing NRA60 pension.

So by my reckoning option 2 might be better as with option 1 I will likely pay 40% tax but would welcome your thoughts.

Cheers

[Hawkey99]

Thats exactly the problem I will be facing. Potentially pay 40% tax on sum of my AVC money.

I guess one way is to take the the pension at the beginning of the tax year if your retiring.....

[RobertT]

Option 1:

Using the usual 20x multiple for the pension I make that a NRA65 pot value of £163,500, meaning a maximum tax free lump sum of £40,750, leaving an excess of £30,750. The first 25% of that would also be tax free, so £7,687, leaving £23,063 to pay tax on.

As the threshold for paying 40% tax is £50k, you'll need other income of less than £27k in the tax year you take your pension to stay completely in the 20% band.

Option 2:

Pot vale = £117,500, giving you a max tax free lump of £29,375, and so an excess of £9,375. £2,343 of that would be tax free and £7,032 taxable.
Plus you can transfer the total £46,000 AVC's to another provider for drawdown. Which would mean £11,500 tax free and the remaining £34,500 being classed as income and potentially taxed.

In practice a lot will depend on other income from your NRA60 pension and any wages in 'part years'. But as Hawkey suggests, taking your pension at the beginning of a tax year could help matters although that's not always possible, and spreading drawdown out over a number of years should prevent paying tax at 40%.

With an NRA60 income of £9,300 you'll have unused Personal Tax Allowance up to state pension age, so make sure you take advantage of that.

There's a lot of variables, so my advice is take your time and work out the various options based on your figures. Make sure you're doing the right thing for you.