By Mohamed Ali Bernat AVCs are likely to be hurt by the allowance of concurrent membership of occupa...
By Mohamed Ali Bernat
AVCs are likely to be hurt by the allowance of concurrent membership of occupational schemes and personal pensions, even though they offer similar tax free advantages.
Providers believe the Government's allowance on concurrency has been vital for simplifying the pensions process but is likely to endanger the AVC market.
Concurrent membership between occupational schemes and personal pensions is now to be permitted for individuals, other than controlling directors, who earn less than £30,000pa. The maximum concurrent annual contribution to a stakeholder will be £3,600. This is higher than the typical AVC allowance, which allows an occupational pension member to top up existing contributions up to 15%. To make contributions of £3,600pa under an AVC some-one would have to pay 15% of a £24,000 salary.
If the pension member becomes ineligible for concurrency, either through earnings rising above the threshold or becoming a controlling director, concurrent contributions can continue for up to five further years. Steve Bee, head of pensions strategy at Scottish Life, said he believed it would be timely for Government to now consider reintroducing the tax free cash element to AVCs to avoid churning.
He added it was likely a lot of existing AVC schemes would be churned into stakeholder or personal schemes because too few people are aware of the 2.25 rule, which allows extra money to be taken out of an occupational scheme on top of the 25% tax free cash. Steve Cameron, pensions development manager at Scottish Equitable, said many individuals may not realise that, for every £100 used to buy an annuity from AVC, they are entitled to draw an extra £225 from the main scheme in tax free cash, subject to having enough money.
The so-called 2.25 rule was introduced in 1989 when AVCs had their tax free cash element removed in 1987. Before 1987 individuals could draw tax free cash from their AVCs in the same manner as their main scheme, meaning 25% for each. Tax free cash can no longer be drawn from an AVC but the 2.25 rule effectively allows a withdrawal of similar value to be made.
However, stakeholder pensions or personal pensions may be the more attractive alternative as it offers the tax free cash element and investors may perceive that they offer a better advantage. Bee added it would have been simpler to set the concurrency threshold at the higher rate tax level, requiring eligibility to be determined by tax returns rather than putting the onus on the individual to police their income levels.
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