My AVC v Mrs SIPP

[Hawkey99]

Wondered if anyone could help with this enquiry.....

Im already over my 25% tax free amount in my AVC.

Option 1 Continue to pay into my AVC (example £100) and save tax and national insurance and then transferring to a SIPP when I take my NRA 65. I would still have to pay tax on the SIPP as my pensions are over £12k. The advantage is initial savings and saving in a fund I am comfortable with. (Shariah fund)

Option 2 Stop paying into my AVC, which would mean pay extra tax and national insurance on this money but then pay £80 into wife SIPP. She will earn less than £12K in retirement (until retirement) and therefore gain 20% tax relief on the way in and not have to pay any tax when she takes it out after 55.

Which might be the better option ?

They look like a "zero sum game" to me but wondered if anyone had any thoughts ?

Thanks

[heapsy]

Hawkeye, you don't say which section of the RM pension you are in. For what its worth, I have a mate in section B. His wife is self employed so doesn't get anything other than tax relief on her contributions. (no employers extra payment) He get a lump sum automatically, unlike section C members. However, he is contributing to AVCs to boost his overall pension. Replacing some of his standard lump sum with those from his AVCs. This will not only give him a higher pension / lump sum, on retirement, but will provide his wife with a higher widows pension if he dies first. Not sure if that answers your question, but might be worth considering as he gets the added uplift of PSE on top of tax relief. Failing that, why not just bung a few quid extra into her pension using a bit of your overtime etc? You might want to find out what options her pension provider has for taking her pension. Annuity, Draw Down etc. For what its worth, I have a private pension along side my RM schemes. I'm 99% certain I will use draw down to access my private pension. Choice is yours, just thought I'd point something out that might be of interest.

[Hawkey99]

Cheers heapsy,

Im in section C.

Have been heavily paying into AVCs for years so now over the tax free amount....

Just trying to work out of there is much difference in me saving into an AVC and paying tax when I get it back as its over 25% of my lump sum already or pay the tax on it now, pay it into dear heifers SIPP account, claim the tax relief and avoid any tax when she draws it down. She is with AJ Bell.

Not sure there is much difference but thought it worth asking in case Im missing anything ??

[heapsy]

Another option might be to divert the money into a Stocks and Shares ISA. Taking the money tax free at the end, or taking a tax free income from it. Pros and cons with everything. S&S ISA wouldn't be a guaranteed regular income as it would fluctuate. Depends on what you want / need.

[NorthernBoy]

Assuming the investment return is the same in either name, then paying the money into your wife’s Sipp is financially the better option. Having more money in her name may also give you more flexibility in planning when she turns 55.

As you say she will not pay any tax on the way out due to her being under the tax free allowance. My partner has a very low pension and we are trying to build her pension up as much as possible.

Remember you can move 10% of her allowance to you either now or in retirement, this will help your respective tax bill.

[RobertT]

I agree with Northernboy! I think in your case, based on your post, paying into your wife's SIPP is the better option.

For example and based just on contributions:

If you were to continue paying into AVC's, each £100 gross will only cost you £68 because of tax relief and PSE. But when you draw the pension, you'll pay tax at 20%.
So a £68 contribution now, means £80 in your pocket in the future, or a 17.64% increase on your money.

If you pay £80 into the SIPP that will be grossed up to £100. You won't benefit from PSE, but your £80 contribution now would mean £100 in your pocket in the future, or a 25% increase on your money.

You will also need to factor in how you plan to access the SIPP – via annuity or drawdown.

I also have AVC's worth more than 25% and although I don't have a wife, I do have a personal pension and am now paying into that instead of Flexiplan, for the reasons given above.
I plan to use it to fund early retirement rather than having a bigger taxable lump sum at 65, and I should be able to withdraw most if not all of it, tax free via drawdown.

Utilising the Marriage Tax Allowance is a good thing to do and can save you a couple of £hundred per year. Basically the lower earner has their personal tax allowance reduced by £1,250 and it's added onto the higher earners PTA instead. Info: https://www.moneysavingexpert.com/famil ... allowance/" onclick="window.open(this.href);return false;

[Hawkey99]

Fantastic.........

Thanks you both so much.....

[Hawkey99]

I agree with Northernboy! I think in your case, based on your post, paying into your wife's SIPP is the better option.

For example and based just on contributions:

If you were to continue paying into AVC's, each £100 gross will only cost you £68 because of tax relief and PSE. But when you draw the pension, you'll pay tax at 20%.
So a £68 contribution now, means £80 in your pocket in the future, or a 17.64% increase on your money.

If you pay £80 into the SIPP that will be grossed up to £100. You won't benefit from PSE, but your £80 contribution now would mean £100 in your pocket in the future, or a 25% increase on your money.

You will also need to factor in how you plan to access the SIPP – via annuity or drawdown.

I also have AVC's worth more than 25% and although I don't have a wife, I do have a personal pension and am now paying into that instead of Flexiplan, for the reasons given above.

I plan to use it to fund early retirement rather than having a bigger taxable lump sum at 65, and I should be able to withdraw most if not all of it, tax free via drawdown.

Utilising the Marriage Tax Allowance is a good thing to do and can save you a couple of £hundred per year. Basically the lower earner has their personal tax allowance reduced by £1,250 and it's added onto the higher earners PTA instead. Info: https://www.moneysavingexpert.com/famil ... allowance/" onclick="window.open(this.href);return false;

Hi Robert,

Just trying to double check the above....... Whilst on the face of it I understand it but Im just wondering if I have already lost £32 (The difference between the gross investment in AVC and the investment in a SIPP before you have looked at home much return I will get.

So Im trying to say (badly) thats whilst the above sum is correct it the amount of return on the AVC doesn't include the £38 uplift from Tax and PSE.

Am I just confusing myself.....

[nataddick]

Agree with Northernboy’s and RobertT’s logic and would simply add wider investment choice, drawdown flexibility and your wife’s non tax payer status make the SIPP option a no brainier ! AJ Bell a sensible choice of provider.

No doubt RobertT will provide a detailed explanation, as always, but yes you are confused !

Recommend you re-visit the tax implications (for you as a tax payer v. your wife as a non tax payer) of investing both on the way in and the way out!

[RobertT]

Hi Robert,

Just trying to double check the above....... Whilst on the face of it I understand it but Im just wondering if I have already lost £32 (The difference between the gross investment in AVC and the investment in a SIPP before you have looked at home much return I will get.

So Im trying to say (badly) thats whilst the above sum is correct it the amount of return on the AVC doesn't include the £38 uplift from Tax and PSE.

Am I just confusing myself.....

Let's say you pay £100 per week into your Flexiplan for 3 years, in total you'll have put in £15,600 gross, but it will only have cost you £10,608 net because you'll be benefiting from tax relief and PSE.

You then take that £15,600 as a lump sum with your NRA65 benefits, but because you already have over 25% of your total pot value in AVC's, you will be taxed at 20%,(assuming basic rate). So you'll only get £12,480 in your pocket, with £3,120 going to the taxman.

So your total cost is £10,608 but you'll be getting £12,480 in your pocket, making it a gain of 17.64% or £1,872.

But if you put £100 gross into your wife's SIPP per week for 3 years, you will still have a total of £15,600 but it will have cost you £12,480 - £80 per week from you and £20 in tax relief.
As long as your wife draws down the cash over a period of time ensuring that her income is within the personal tax allowance, then she can withdraw the whole £15,600 tax free.

So the cost to you would be £12,480 but you'll be getting a total of £15,600 in your pocket, making it a gain of 25%, or £3,120.

So although paying into the SIPP is the more expensive option on the way in, overall it's the better choice because you don't pay any tax on the way out.