One reason you might choose to save for your retirement with an AVC plan, alongside your main scheme pension, is the tax savings AVC contributions offer.
You have the choice of paying your contributions with an AVC plan or a Salary Sacrifice Shared Cost AVC plan. Tax savings made with these plans differ. Below we explain how.
If you already have an AVC plan and want to make future contributions as Salary Sacrifice Shared Cost AVCs, then you’ll need to start a new plan.
With Salary Sacrifice Shared Cost AVCs, you agree with your employer to reduce your pay. In return, your employer will pay an amount equal to the reduction in your pay, into an AVC pot in your name. This will reduce your earnings and you'll pay less income tax and National Insurance, depending on your personal circumstances (as you can see below, for a 20% rate taxpayer paying 12% NI). For more information about the rate of National Insurance visit the HM Revenue & Customs website.
You’ll also have to contribute a total of £1 each time your employer pays your Salary Sacrifice contributions. If you're a 20% rate taxpayer, a £1 contribution will cost you £0.80. The £0.20 you'd pay in income tax would go into your AVC pot instead. If you pay tax at a higher rate, the cost to you will be even less. You’ll normally make income tax savings on the £1 contribution, but not National Insurance savings.
The process is simple and it's all done for you by your employer. Salary Sacrifice Shared Cost AVCs may not be suitable or possible for some members. Your employer can provide you with further details of how salary sacrifice works in their salary sacrifice shared cost arrangement.
Regular AVCs are taken from your pay before tax, so the money you’d normally pay as income tax will automatically go into your AVC pot instead, as you can see below. If you pay tax at a higher rate, your tax savings will be higher. If you don't pay tax, you won't benefit from tax savings.
The total amount of tax relief you get on your pension savings is limited so make sure you're aware of the 'Important information about pensions allowances'. The UK Government may change these allowances from time to time so check their website to see any changes which may impact you. If you think you might be affected, you can get more information from the HM Revenue & Customs website.
If you're a member of a Salary Sacrifice arrangement, please speak to your employer about how this may affect you.
Tax savings will depend on your individual circumstances and rules can also change.
As your contributions, including any paid by Salary Sacrifice, are deducted from your earnings before your tax bill is worked out, the amount of income tax you pay will be based on what’s left.
If you're a Scottish taxpayer, you’ll pay tax based on the Scottish rate of income tax and tax bands. For more information on Scottish income tax, visit gov.uk/scottish-rate-income-tax.
If you're a Welsh taxpayer, you’ll pay tax based on the Welsh rate of income tax and tax bands. For more information on Welsh income tax, visit gov.uk/welsh-income-tax.
AVCs could be just the thing to provide you with extra in retirement.
Change your contributions to suit your needs and circumstances.
When it comes to choosing where to invest your AVCs, there's no need to feel overwhelmed.
You have a number of options for taking your money.
Prudential is an appointed AVC provider to 72 of 99 Administering Authorities within the LGPS.