Loan v AVC

Hawkey99 · Post by **Hawkey99** » 01 May 2016, 20:06

Would it make financial sense to borrow £10k at 3.9% and then get £10k of my wage paid into my AVC. and possibly repeat this a few times

Idea being to avoid tax and national insurance.

Thinking of retiring at 60 in 6 years time.

I know i can only take 25% of my total pension and abc combined as a tax free lump sum.

Thoughts please...

heapsy · Post by **heapsy** » 01 May 2016, 21:00

Hawkey99 wrote:Would it make financial sense to borrow £10k at 3.9% and then get £10k of my wage paid into my AVC. and possibly repeat this a few times

Idea being to avoid tax and national insurance.

Thinking of retiring at 60 in 6 years time.

I know i can only take 25% of my total pension and abc combined as a tax free lump sum.

Thoughts please...

How long would it take you to drip feed 10k into you AVC? The only other way would be to pay a lump sum in, but that wouldn't make sense.

Hawkey99 · Post by **Hawkey99** » 01 May 2016, 21:28

I would pay in out of my wages so could put in £300-£350 per week, if it made sense.

heapsy · Post by **heapsy** » 01 May 2016, 22:35

The simple answer is no. This is because you could end up buying high. What I mean by that is this. When you drip feed money into a pension / AVC endowment etc, you buy shares and or units at a given price on the day of the transaction. Sometimes the price is high, sometimes it is low. This is called pound / dollar cost averaging. Basically it is a way to ensure your investment doesn't plummet in value. You also have to bare in mind that you would have the cost of the loan to repay, interest @ 3.9%. This added to the admin charges @ .35% for buying / selling the units held within the AVC would make it a costly exercise. Far better to drip feed as much as you can each week and spread the cost. Also, if anything happened and you needed to stop paying in then you could do so easily. You would also be able to re start your payments when you were financially able to.

Hawkey99 · Post by **Hawkey99** » 01 May 2016, 23:21

Great advice Heapsy. Much appreciated

Post by **RobertT** » 02 May 2016, 08:32

On the face of it your suggestion is perfectly viable. If you’re paying in on a weekly basis and after you’ve factored in tax relief & PSE, the £10k going into your AVC should effectively only cost £6,800 overall. That saving should outweigh the interest on the loan with ease.
In effect you’d be paying more today in the form of interest for a bigger tax free lump sum in the future.

However there are a few questions to ask yourself:

How long is the loan term and how much interest will you pay over that time?

Why do you need to borrow £10k when borrowing £6,800 would be enough?

Would you effectively be using the money you borrow to pay back the loan? In which case can you not afford to pay the extra AVC’s anyway?

At the rate of £300-£350(gross) per week you’ll hit £10k after about 6-8 months, which will presumably make up a large chunk of your pay. So I assume the plan is to live off the money you’re borrowing and pay interest on the basics like food and utilities? That would be a bit of a slippery slope to be on in my opinion.

Would the extra payments, and factoring in PSE, put your pay below the NI threshold, otherwise known as the LEL* which is currently £5,824? In which case, my understanding is that your state pension may be affected.
Also salary sacrifice(PSE) isn’t allowed to take your pay below the minimum wage.!
*The LEL in this context relates to the national rate as decided by the Treasury and not the RM rate(£3,328) that was frozen in 1999/2000.

Would paying in the £10k in one go be a better option? I’ve paid a few lump sums into my AVC’s in the past and if it still works the same, you have to pay the gross amount in by cheque and you get the tax relief back a few weeks later via your wages. So that would effectively only cost £8,000. PSE wouldn’t come into it as far as I’m aware.

Paying in a lump sum is a little different to paying in regular weekly/monthly amounts as heapsy alluded to. If you invest when markets are low, you’re getting more for your money and therefore it’s generally more likely to grow. And the opposite applies to when markets are high. Therefore the timing of your investment can be very important.
It may also be easier to manage your money on a weekly basis because you’ll still have a healthy wage coming in.

In short, I would say it’s an irregular thing to do but there are benefits as long as you can afford it, you don’t disadvantage yourself in other ways and are strict with your budgeting, etc. But then those things would apply if you were just paying AVC's in the normal way without having to pay interest aswell.

Hawkey99 · Post by **Hawkey99** » 02 May 2016, 17:48

Robert T,

Thanks for your reply.

So just to be clear if I paid in the £10,000 in a lump sum what would I get back in Tax relief. Is there any national insurance impact in doing this.

Thanks

Post by **RobertT** » 02 May 2016, 18:19

If you were to pay in £10k in one chunk by cheque you would get £2k back in tax relief. There would be no effect on NI, so the net cost to you would be £8k. However the rules on these things only allow you to pay in an amount equal to what you have earned in any one tax year or part year. So you would have to wait until you have earned £10k before you can put that much in. You will also need to allow for other AVC’s you might already make aswell as your payments into the main RMPP scheme, so in effect you’ll have to have earned more than £10k before you can invest that much.

Investing via your wages on the other hand would mean you get tax relief at source and also benefit from PSE and therefore will pay less NIC’s aswell, although that route lends itself more to lower contributions and over a longer period of time. But allowing for the effect of PSE that gross payment of £10k should only actually cost you £6,800 net.

heapsy · Post by **heapsy** » 02 May 2016, 19:05

Something that you need to consider is what would be the return on the invested lump sum? Some years investment don't do that well. It's a bit of a mine field, but personally I would go down the route of drip feeding the money in. At least you can sleep a bit easier at night.

Post by **RobertT** » 03 May 2016, 14:24

I do tend to agree with you heapsy, drip feeding is the far safer method. Lump sums are more about timing and with the markets being at fairly high values at the moment, it may not be the best time to put in large amounts. But it would also depend on which fund/s Hawkey99 is planning on investing his money in. I would assume he’s done his homework on that front.

Hawkey99 · Post by **Hawkey99** » 03 May 2016, 16:54

Hi all,

My AVC is with the Growth fund which I would be feeding it into.

Its not had the greatest of rides recently so might be due a pick up soon.

Thanks

Hawked

Post by **celtic1967** » 05 May 2016, 19:08

At 55 and looking to retire at 60, I can afford to invest around £500 a month. Would paying into AVCs be my best bet to increase my lump sum at 60 ?
This financial stuff is completely new to me and I think I need to wise up quickly.

Post by **RobertT** » 06 May 2016, 06:20

celtic1967 wrote:At 55 and looking to retire at 60, I can afford to invest around £500 a month. Would paying into AVCs be my best bet to increase my lump sum at 60 ?
This financial stuff is completely new to me and I think I need to wise up quickly.

The main aim of AVC’s is to fund your tax free lump sum and so preserve your index linked pension. The higher the value of your overall ‘pot’, the higher your lump sum could be. Your main RMPP benefits will have a value which is roughly 20x your annual accrued pension to date. The value of your AVC’s would be added on and a maximum of 25% could be taken as a tax free lump sum.

As has already been mentioned on this thread, tax relief and PSE make a £1 gross payment into AVC’s only actually cost £0.68. Where else can you get an uplift of 47% on your money for doing nothing?

Post by **celtic1967** » 06 May 2016, 18:28

The main aim of AVC’s is to fund your tax free lump sum and so preserve your index linked pension. The higher the value of your overall ‘pot’, the higher your lump sum could be. Your main RMPP benefits will have a value which is roughly 20x your annual accrued pension to date. The value of your AVC’s would be added on and a maximum of 25% could be taken as a tax free lump sum.

As has already been mentioned on this thread, tax relief and PSE make a £1 gross payment into AVC’s only actually cost £0.68. Where else can you get an uplift of 47% on your money for doing nothing?[/quote]

Thanks for the reply !! Sounds like I need to get hold of a financial advisor

jetblack · Post by **jetblack** » 06 May 2016, 20:10

Maybe put the lump sum into the cash fund - then drip feed it from there to any of the other funds.