Don’t miss out on the extra tax relief available this year
Research from Unbiased.co.uk, has found that UK workers in company pension schemes are missing out on huge sums by neglecting to save more tax-efficiently.
As a result, higher-rate taxpayers, who are members of their employers’ occupational pension schemes will miss out on an extra £720m available in tax relief this year by failing to make Additional Voluntary Contributions (AVCs).
AVCs run alongside employers’ pension schemes and allow employees to pay extra contributions over and above their standard monthly retirement savings, which could help build up a larger pension pot for retirement.
For the vast majority of people the annual pension savings limit is 100 per cent of salary. However, following ‘A’ Day the rules place an overall lifetime limit on tax-advantaged pension funds of £1.75 million (2009/10). There is a tax charge for values in excess of the limit at retirement, and for excess contributions in a year over the annual limit, which this year is £245,000.
Transitional arrangements protect those who have already reached the ‘lifetime’ savings limit at 5 April 2006, but protection needed to be registered by 5 April 2009.
So technically, if you earned £50,000, you could put away that amount a year into your pension pot, however, people earning over £150,000 my find their permissible pension contributions restricted by the recent Budget announcements.
There are two kinds of AVCs. The first type, added years AVCs, allows you to buy extra years service in your employer’s final salary scheme. So if you agree to pay a set amount you can usually get up to an extra five years service. So instead of retiring with just 20 years service, you can retire with 25 years.
As you are receiving final salary benefits by contributing to these plans, if you have one available, it is probably the most appropriate vehicle for additional pension savings.
One word of caution though because AVCs buy you extra years in the final salary scheme, if your employer gets into financial difficulty you could find yourself falling back onto the Pension Protection Fund for compensation.
The second type of AVC is a money purchase AVC. These allow you to contribute to a pension pot separately from your employer, usually with an insurance company.
Your fund options are usually limited and you might be paying hire costs for these contracts, so since A-Day, in April 2006, when the government overhauled the UK’s pension regime, they have really been replaced by stakeholders, personal pensions and self-invested personal pensions.