Pension (Shared Cost AVC)

I’m in the local government pension scheme and we are being offered access to Shared cost AWC. The blurb says:

Key benefits of a Shared Cost AVC
Income tax and NIC relief when you pay into a Shared Cost AVC
Potentially 100% tax free withdrawal at retirement*
Flexible access from age 55 potentially allowing you to retire early.
A Shared Cost AVC can save you money in both income tax and national insurance contributions (NICs), making it more beneficial for you when compared with paying AVCs in the standard way e.g. a £100 contribution could actually cost a basic rate taxpayer just £68.12.

Seems a good deal, what am I missing?

Following with interest – I’m in the same scheme and it does indeed look attractive. By my understanding, Providing the total of your AVC pot does not exceed 25% of the total pension pot value, you can take them tax free at point of retiring.

I have heard of a few people putting pretty much their whole final years salary in as AVC to take out tax free when they retire as a lump. I think you can also manage the funds your contributions go to as well if you are so inclined.

How much are the local government contributing? Its only a shared AVC if they put in as well!

How much are the local government contributing? Its only a shared AVC if they put in as well!

I’ve not been able to go to the workplace presentation about it yet so I don’t know, but that question was already top of my list! I would be amazed if they contribute anything though, it is not as if they have spare cash kicking around. Even without their contributions though, it could still be a good deal.

I’m in a final salary scheme but make large AVCs too (not shared). The 25% tax free amount I can take at retirement in my scheme refers to the combined value of both AVC and FS, rather than just the AVC – which is about 25% of the total value. Check you don’t have the same conditions.

Any thoughts from the evening crowd?

No pension expert, but this seems to explain it ok:

Shared Cost AVC

There sites to be little downside. Your employer deducts AVCs as salary sacrifice, giving some additional tax relief. Not huge, but not insignificant.

Seems to generally be a good thing, but I dare say there will be some exceptional individuals who would not benefit, but those people are probably few and far between.

IANAPA 😁

HMRC allow tax relief on 25% of your pension pot in a single pension scheme. If the lump sum in your DB pension is less then 25% of the total, the point of an AVC is that it’s in the same scheme, so you can use the rest of the 25%. Another benefit, if you’re paying 40% tax on any of your income, is that you can use the AVC to put enough in the pension to get your taxable income below the threshold.

From andrewreay’s link, it looks as if the main difference between shared cost and ordinary AVCs is that you can save NIC as well with a shared cost.

You have to stay within the Annual Allowance for how much you can put into a pension per year, since if you exceed that you don’t get the tax relief. What you’re able to put in an AVC is the Annual Allowance less the increase in value of your DB pension over the year. You can also carry forward any unused Annual Allowance in the previous 3 years. I started putting money in my AVC 3 years before I retired; in my case it was well worth the time spent understanding the rules.
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