How much can I pay into the new AVC

[Flashman_]

I am thinking of paying into the AVC plan for the new collective pension, more as a way of saving tax than building a pension pot. Can anyone answer some questions I have.

Firstly what is the maximum I can pay in, I have read on here somewhere that I cannot put more in than would leave me with the minimum wage (is that true ?) I also plan to reduce my hours from full time to part time over the next couple of years and only plan on staying employed by RM for up to 5 more years. I aim to pay in enough to the AVC to reduce my taxable income to no more than the standard tax allowance (£12570), therefore I would effectively pay no tax on my earnings, or have I got the wrong end of the stick on this?

Secondly, when I leave RM or take the pension, I understand 25% of the value can be taken Tax free, but what happens to the rest, Do I have to take it all at the same time(and therefore pay tax on it) or does the rest remain in the pot and can be taken at another time, of my choosing? for example when my income would be much lower due to retirement (and less likely to pay tax on it therefore)

Thirdly, can I take the new pension and AVCs at any time after 55 (I am 59 now) independently of the other 2/3 pensions with RM, as it is with the closed schemes.

My other option would be to take out a personal private pension, which is similar and more flexible however tax relief is given on this after pay deductions so it is more complicated.
Thanks in advance for any help.

[ihatedogs]

Presuming you're on 38 hours, national minimum wage would be £463.98 so if the pension is your only salary sacrifice then you can go down to this.

[RobertT]

I am thinking of paying into the AVC plan for the new collective pension, more as a way of saving tax than building a pension pot. Can anyone answer some questions I have.

Firstly what is the maximum I can pay in, I have read on here somewhere that I cannot put more in than would leave me with the minimum wage (is that true ?) I also plan to reduce my hours from full time to part time over the next couple of years and only plan on staying employed by RM for up to 5 more years. I aim to pay in enough to the AVC to reduce my taxable income to no more than the standard tax allowance (£12570), therefore I would effectively pay no tax on my earnings, or have I got the wrong end of the stick on this?

Technically you can pay in as much as you want into the RMCPP/AVC's, up to how much you earn. But as other deductions will still be payable, I think they usually say 85% of your earnings is the effective max.

However, if you want to take full advantage of salary sacrifice(PSE), you'll need to ensure your pay doesn't go below the minimum wage, as otherwise you'll lose that benefit on all your pension contributions. It's a nice little earner that can add up if you pay in a decent amount over a few years!

Secondly, when I leave RM or take the pension, I understand 25% of the value can be taken Tax free, but what happens to the rest, Do I have to take it all at the same time(and therefore pay tax on it) or does the rest remain in the pot and can be taken at another time, of my choosing? for example when my income would be much lower due to retirement (and less likely to pay tax on it therefore)

When you take your total RMCPP benefits, the lump sum(inc booster) and AVC's will be used to fund the tax free cash, with any remainder being paid out as a UFPLS, which means the first 25% of that is also tax free and the rest classed as income and taxed accordingly.

Or you also have the option of transferring the different elements to a personal pension, but only if you do that before you take the main benefits.

Thirdly, can I take the new pension and AVCs at any time after 55 (I am 59 now) independently of the other 2/3 pensions with RM, as it is with the closed schemes.

The RMCPP is totally separate from RMSPS/RMMP/RMDCP benefits and you can take it anytime between 55 and 67, but reductions will apply if before 67.

My other option would be to take out a personal private pension, which is similar and more flexible however tax relief is given on this after pay deductions so it is more complicated.

You can do both – AVC's up to the PSE limit to take advantage of that, and a personal pension for any more you want to save. Then transfer the AVC's over if you choose to.

There's loads of info about what you can do with your RMCPP benefits in the Collective Plan Handbook on the RMCPP website.

*I assume you're already paying into the lump sum booster, as the employer contributions make it a no-brainer!

[Flashman_]

Thanks Robert, yes I have set up the bonus 1%, that’s a no briner really, given it adds about a tenner a week to the lump sum as I understand it.

On the max AVC I can pay. Why does the minimum wage limit have the effect of removing all tax relief on all my pension contributions if I go below it?

I never do OT, so I am only about £50 or 10% above the minimum wage anyway, so does that mean that I could only add £50 to an AVC? I really wanted to add more like 25-40% of pay. I guess that’s not possible then?

[RobertT]

It doesn't remove any tax relief but it does remove the benefit of salary sacrifice(PSE) on all your pension contributions and any other tax efficient payments you make via your wages.
I can't really tell you why, other than that's the rules of salary sacrifice!

So with tax relief and PSE, each £1 gross(the amount on your payslip) going into your RM pension is only actually costing you 72p, because your income tax is being reduced by 20p and your NIC's by 8p.

But if you lose the benefit of PSE by reducing your pay to below the minimum wage, you'll lose that 8p in the £ benefit and each £1 will cost you 80p instead.

So you have a choice:

1. Stay within PSE for your AVC and pay any extra you want to save into a personal pension, which will also benefit from tax relief, but not salary sacrifice.
2. Forget about PSE and just pay as much as you want into your AVC.

*Tax relief and salary sacrifice are set at the current rates for income tax and NIC's, which are 20% and 8% respectively. Those rates always have the potential to change.

[Flashman_]

Thanks Robert.

[heapsy]

Prior to the recent increase in the minimum wage, I was paying 8% in to the AVCs. As we haven't received a pay rise so far, I reduced my payment to 5% and have remained within PSE. I will review this when our pay deal is settled. I also, am using it as a tax saving vehicle, as I have maxed out on the state pension. Hope this helps.

[Flashman_]

Thanks heapsy.