ISA or AVC for VR lump sum?

[casp21]

I have put this onto the pensions forum but wanted to add it to Blue Shirts also to get the maximum replies.

I want to invest £30k from my upcoming VR and don't know which would be better. Putting it into an ISA (£15k each for hubby and me due to maximum allowances) or the whole lot into my pension via an AVC. I'm not sure about the way tax works regarding putting money into my Royal Mail pension (AVC). Is there tax relief etc, I am a basic rate tax payer but the VR would make me a higher rate tax payer for one year. Does anyone know which would be better in the long run for maybe the next seven years. An ISA or an AVC? Thanks. I am 51.

[IcanthelpthewayIam]

Will you need access to the funds at any point before retiring? (You mentioned putting it away for 7 years)

[Hodsyharry]

From what I have read upto 30,000 redundancy is tax free. https://www.moneyadviceservice.org.uk/e ... ncy-payout" onclick="window.open(this.href);return false;

[casp21]

I wanted to take the money in about seven years and access my pension. I know I can access it at 55 but want to leave it for a few extra years to build.

Also this money is after the first £30k which i know is tax free. It is part of the remainder of my VR which I want to put away in a lump sum. I know that if I receive the money to try to put it in various different ISA's, bonds, shares etc it will be taxed at 40% first due to it bringing over the higher rate threshold for my earnings for the year (added to the remainder of my VR package also). That's why putting it into an IVA I will get tax relief and not have to pay the 40% tax, although I don't know how this works?

[casp21]

sorry that should read AVC, not IVA, silly me.

[IcanthelpthewayIam]

What do you mean by accessing it at 55? Reason being you may not be able to access it all at 55 there's a rule change coming with pensions but as it stands at the moment you wouldn't be able to access the full 30k as a lump sum at 55

[casp21]

So the AVC lump sum that I put in from my VR will not be able to be accessed as part of the new flexible pension rules from age 55? Do you know when you can access it?

[Darren Bent]

You should talk to Financial adviser to see what other options are there for you. You could also consider investment ie buying shares / property / etc.

[RobertT]

So the AVC lump sum that I put in from my VR will not be able to be accessed as part of the new flexible pension rules from age 55? Do you know when you can access it?

Information on how AVC’s will be treated as part of the new flexible pension rules is still very murky and considering we’re now only a month away it really shouldn’t be that way! Which is why I suggested in your other thread (on the pensions board) that you should consider a personal/stakeholder pension or a SIPP, because they are totally separate from your RM scheme and therefore will definitely be available from 55 under the new rules. Although you need to bare in mind that any money you take out of a pension including an AVC, other than the tax free element, would potentially be taxable depending on your other income, so the best way to withdraw it would be on a gradual basis rather than in one go.

[jetblack]

I suggested in your other thread (on the pensions board) that you should consider a personal/stakeholder pension or a SIPP,

Yes - a SIPP might be an option here.

you need to bare in mind that any money you take out of a pension including an AVC, other than the tax free element, would potentially be taxable

Bare in mind though that if you are a (basic rate) taxpayer, then any payment into a SIPP will be topped up to the tune of 25%, courtesy of the Govt.- probably about 8 or 9 weeks from the date you make the SIPP contribution.

So say you put £10k into a SIPP tommorrow, then when its all been processed, your SIPP account will eventually be topped up by another £2500 "free". This works, just as a matter of interest, even if you earned only (say) £9000 in the year - and so didn't actually pay income tax at all. In other words, you just have to be working to receive the tax refund.

So, although you may (or may not) get taxed at 25% when you later come to withdraw it as a lump sum, you are, in effect, only giving back that which HMRC gave you in the first place. You have lost nothing of your payout.
Whereas if you take it as income and invest it in an ISA you'll be paying the applicable rate of income tax on it. You have lost 25%/40% of your payout.

Thats my understanding at least.

[casp21]

Thanks Robert. Although I am taking VR no-one in Royal Mail seems to guide you in what to do for the best. I have had to do all the research myself. Also I have read that because the amount I am getting will bring me into the higher rate tax threshold (after the first £30k), then to save anymore getting taxed at the 40% I am better putting it into my pension which I don't mind doing. I know that this will be in the form of an AVC which won't then be taxed as part of the redundancy payment. Its all really confusing and just want to maximize my VR without having to give chunks of it to the tax man. I'm prepared to invest it for the long term and go back to working somewhere else, so just want to make the money work. Do you think I could put it into a SIPP (which to be honest I don't even know what this is) to save on tax? Thanks again.

[RobertT]

Pensions can be very confusing at times and rules seem to change virtually yearly, but the main decision for you is when do you want to access the money you receive from VR? f you’re willing to tie it up until you take your RM pension, ideally at 60, then put it in an AVC and use it to fund your tax free lump sum at the time and preserve your index linked pension. But that would tie it up for a bit longer than the 7 years you mentioned.

The added benefit of putting it in an AVC is that it’s all kept ‘in-house’ although to be honest I’m not 100% sure how the process works, presumably you will have to tell either HR or the Pension Service Centre of your wishes.

If you want to access it earlier than that, then another pension arrangement is an option because you still get the initial tax benefits, while being able to get at it from 55. Although anything taken out, other than the first 25%, would potentially be taxable later on depending on your income at the time. And as your aim is to make the most of your money, ideally you won’t want to pay any tax at all.

If on the other hand you want even easier access then an ISA or other savings account would be better, but you would definitely pay tax.

Personally I would go for the AVC but I was putting the SIPP/other pension option forward just as a suggestion. Ultimately it will be a personal decision based on your own wishes and circumstances.

[casp21]

Robert, I think you are right. I will put it into an AVC attached to Royal Mail. It seems to be the best bet. I don't want to lift it until I am 60 so don't mind putting it away for a long time. I read somewhere that I can lift it all as a lump sum when I turn 60 but can access parts of my other Royal Mail pension if I needed it from 55 on-wards but keep the AVC going. The returns seem a lot better than the overall interest in an ISA and if I take the money with the RV it will be taxed upfront, so better to put it into my pension and not pay tax.