Accessing your Additional Voluntary Contribution (AVC)

Transcription

1 Accessing your Additional Voluntary Contribution (AVC)

2 Accessing your AVC savings Now is the time to start making decisions about your retirement and your future. One of the most important things to think about is that you may have to make your money last for a long time. The average time spent in retirement is between years. That is a long time to budget for and the responsibility to support yourself financially is in your hands. You may already know what you want to do with your AVC savings or you may need to think about your options. This brochure covers the choices available to you and includes key considerations so you can make an informed decision about your AVC savings. Whatever you decide to do with your money you will need to give us a call (even if you don t want to do anything). Our team of retirement consultants are here to help you through your journey. In addition to the support we can offer, the Government are offering a service called Pension Wise which will give free and impartial guidance. We recommend that you use this service. Find out how to access this by visiting or by calling Call today on the number in the Prudential letter sent with this pack to speak to one of our retirement consultants. Things to think about 3 A guaranteed income for life 4 Maintain control of your investment 9 and have access to your money Taking your money as a cash lump sum 11 A combination of all the options 14 Not ready to access your AVC savings 15 Support for you and next steps 17 Useful sources of help 18 2 Accessing your AVC

3 Things to think about You may have been saving into your AVC for a number of years. Therefore, it s important you make the right decisions when it comes to your AVC savings. Here are some key things you should consider: Your health Your health may influence what you choose or need to do with your money. Throughout this brochure you can find out more information about the impact your health could have just look for the heart symbol in each section. Looking after your loved ones Do you want to be able to provide for a loved one after you die? Your money will buy less in the future Inflation could eat away at the buying power of your money. If your money doesn t grow over time, the effect of inflation will reduce what you can buy in the future. Do you have a number of pension pots? The total amount of savings you have could impact what you choose to do with your money. You can choose to use your AVC and other pension pots in different ways. Depending on the type of pension you have you may not be able to combine them or it might not be beneficial. For example you may have valuable guarantees that would be lost if you combined pots. Tax and other considerations Whatever you decide to do with your savings, when you decide to take them, you will usually be able to take up to 25% of your AVC fund free from tax. You also need to think about the impact of any tax-free cash, income or lump sum on any means tested benefits that you may currently receive, for example housing benefits or pension credits. Accessing your AVC 3

4 1 A guaranteed income for life You can use your AVC savings to provide you with a guaranteed income for life. This is known as an annuity. The main benefit of an annuity is that you will continue to be paid an income as long as you live, no matter how long that is. You will never have to worry about not receiving an income. Prudential has two types of annuity: Guaranteed Pension Annuity This gives you a guaranteed income for life. You can be safe in the knowledge that your income will never decrease so you will know exactly what you are going to get. There are options to help protect against the effects of inflation meaning that your income could increase. Details of these options can be found in this section. Income Choice Annuity This also gives you a guaranteed income for life, but your income has the potential to increase. Your AVC fund is invested in our With-Profits Fund and your income is linked to the performance of that fund. Like any investment, the performance can vary so your income can fall as well as rise. However, we guarantee that we won t pay you less than a certain amount, which we will tell you before you take out the plan. The Income Choice Annuity also gives you some flexibility about the amount of income you take. You can choose your starting income (from a range that we give you) and you can usually change this every year as your income needs change. To buy this you need a minimum AVC fund of 10,000 after taking any tax-free cash. If you don t already have one and would like a quote for an Income Choice Annuity please give us a call. If you decide that an annuity is right for you, it is important to know that you don t have to stay with Prudential. You should shop around and, depending on the choices you make, you may be able to get a higher income elsewhere. 4 Accessing your AVC

5 Key considerations: You could get a higher income if you and/or your loved one (if you select a joint life option) has suffered from a medical and/or lifestyle condition. Annuities work the opposite way to say, life insurance. If you and/or your partner are in poor health you could actually be entitled to more money. To give you some examples of what conditions may or may not be covered you can find two case studies on page 8. If you think this might apply to you or you are not sure but would like to talk about it, please call us on the number shown in your Prudential letter. The income quotes we have included do not automatically take your health into consideration, so it is important you call us, if you haven t already spoken to us about this. Remember that you should shop around for your retirement income. Other companies may cover different conditions to Prudential and also may use different criteria which means you could get more or less income elsewhere. If you would like to have the peace of mind of knowing your loved one will continue to receive an income after you die, you have to select this option when you buy the annuity. You cannot add this option at a later date. There are two ways you can provide an income for a loved one: Joint Life You can choose for an income to be paid to your loved one after you die. This can either be the full amount or a percentage of the income you receive. The higher the percentage you choose to leave your loved one, the lower your own starting income will be. For more specific details on who can or can t be covered please see the Key Features document which you will be sent if you are interested in this option. Alternatively you can call us for a copy. Payment Guarantee Period If you choose a Payment Guarantee Period this means that an income will continue to be paid for a set period of time, if you die within that time. This can normally be up to ten years from when your annuity starts. So if you die within your chosen Payment Guarantee Period, we ll continue to pay your income to your estate until the end of that Guarantee Period. After your Guarantee Period has finished, the income will stop. If you don t select either of these options, then your income will stop when you die. Other companies may be able to offer payment guarantee periods and joint life options not available through Prudential. Accessing your AVC 5

6 Comparing different options for protecting loved ones The graph below shows you how some of the options can affect starting income. This is based on someone who dies three years after buying their annuity. Your annual income Loved one s annual income Single-Life 1,538 No income paid 5 year Guarantee Period 1,534 1,534 Income stops after 5 years 10 year Guarantee Period 1,518 1,518 Income stops after 10 years 50% Joint-Life 100% Joint-Life 1,415 1, ,320 Income is paid for the remainder of the loved one s life Years Based on a 65 year old male who buys a level Guaranteed Pension Annuity with a 30,000 AVC fund after tax-free cash and is paid monthly in advance, based on a spouse 3 years younger. Rates as at December This is an example and annuity rates are constantly reviewed. 6 Accessing your AVC

7 Key considerations: You can select different options to help protect your income from the effects of inflation. If you choose a Guaranteed Pension Annuity, you could opt for an escalating annuity. This means that you get a slightly lower starting income but your income will grow by a fixed amount. You can select an amount between 0.01% to 8.5% and your annuity income will increase by this much each year. You can also select an option that will link your income to inflation. This means your income will change in line with inflation. If you choose an inflation-proofed income and inflation falls below zero, your income will go down, unless you choose a negative inflation guarantee. Our Income Choice Annuity has the potential to grow each year, which might help protect your income from the effects of inflation. Although, like any investment-linked annuity, your income could fall as well as rise. If you have a number of pension pots, combining them with your AVC may increase the options available to you. It s important that you look at each pension though, as some may have valuable guarantees that could be lost if you combine pension pots. Alternatively you could consider using each pot separately for example, you could use one to buy an annuity and take one as a cash lump sum. It s important to know that you re unable to combine your main Teachers benefits with your AVC. You can usually take up to 25% of your savings as a tax-free lump sum and the rest will normally be subject to tax. Taking an income for life John has decided that taking a guaranteed regular income from his AVC fund is the right thing for him. John wants the security of knowing that he will get a regular amount every year for as long as he lives, however long that might be. John also wants to ensure his wife Paula has an income if he dies before her so he has opted for an income to continue to be paid to Paula when he dies. John wanted some money now to help pay off his debts so he took his 25% tax-free cash and bought an annuity with the rest of his AVC fund. After taking his tax-free cash, John had AVC savings worth 30,000. This gave John an income of 1,415. Having selected the Joint Life option at 50%, John will be safe in the knowledge that if he dies before her, Paula will then start to receive 707 a year for the rest of her life. Accessing your AVC 7

8 Could you be entitled to a higher income because of a medical condition? Qualifies: Matthew is a 65 year old teacher and has an AVC fund of 30,000. He has had Chronic obstructive pulmonary disease for 5 years, he takes medication to reduce the breathlessness and was admitted to hospital when he had an exacerbation. He smokes 20 cigarettes per day. Matthew completed a medical questionnaire and we were able to offer him 1, a year that is 20% higher than our standard guaranteed pension annuity rates. If Matthew hadn t told us about his condition and opted for the standard Guaranteed Pension Annuity his income would have been 1, This is based on a single life and is paid monthly in advance*. Doesn t qualify: Sarah is also a 65 year old teacher and has an AVC fund of 30,000. Sarah completes a medical questionnaire and tells us she suffers from a stomach ulcer, asthma and epilepsy. However, due to advances in treatments and medicine her life expectancy wouldn t be reduced. She therefore would not qualify for an increased income with Prudential but she should shop around as other companies may cover different conditions to Prudential and also may use different criteria. This means she could get more or less income elsewhere. If Sarah chooses our Guaranteed Pension Annuity she would receive an income of 1, a year. This is based on a single life and is paid monthly in advance*. * Rates as at January All examples are for illustrative purposes only and do not recommend a course of action. Remember that you should shop around for your income and other companies may cover different conditions to us and may use different criteria which means you could get more or less income elsewhere. Next steps if you are interested in a guaranteed income for life If you would like to find out more about annuities, have any questions or would like us to send you additional quotes then please call us. Our team of retirement consultants are here to help. We know this is a big decision and we are only at the end of the phone. If you have a medical and/or lifestyle condition or would like to discuss this more, it is very important that you call so we can make sure we offer you the highest income we can. And don t forget it is important to shop around. Once you have taken out an annuity you currently can t change your mind or cash it in even if your circumstances change. 8 Accessing your AVC

9 2 Maintain control of your investment and have access to your money You can invest your AVC savings in a similar way to your current AVC and take an income from it as and when you like. This is done by transferring out of your existing plan to a drawdown plan outside the Make Teachers Scheme. This gives you greater flexibility whilst also retaining access to your fund should you need a lump sum in the future or would like to buy an annuity if your needs change. Whilst drawdown doesn t provide a guaranteed income for life, if you die then any fund left at that time is available to provide for your loved one. The remaining balance may be subject to tax depending on the circumstances. As funds remain invested in your drawdown plan you will need to decide how much risk you want to take. You would also need to regularly review your investment decisions to make sure they are meeting your needs as and when they change. It is important to know that there is an investment risk with drawdown and this means that the value of your investment could fall as well as rise and you could get back less than the original amount invested. The value of the fund may be eroded especially if investment returns are poor and a high level of income is taken. This could result in a lower income in the future. As with all of the options, it is important that you are comfortable with the risks if you are considering drawdown. It s also important to remember that you don t have to do something with Prudential. You should shop around and, depending on the choices you make, you may be able to find a more suitable option elsewhere. Key considerations: Your health has no impact on the income you would receive from drawdown. You can nominate someone who will be paid the remaining balance of the fund or an income when you die. As your money has the potential to grow this could help combat the effects of inflation. But there are no guarantees your investment will outperform inflation and the value may fall. You need to think about the investment funds you choose, the level of risk you want to take, you may get back less than your original investment. If you transfer your AVC to a drawdown plan and combine it with other pension pots, having everything in one place could make things easier to manage. Some drawdown contracts require a minimum amount in your fund, so combining your AVC with other pension pots may be a way to achieve this. Combining your AVC with other pension pots may not always be possible, or the right choice for you, as you may have some plans with guarantees that might be lost. There may also be specific rules that prevent combining with another plan. Transferring funds between pension providers is an important decision so we recommend that you speak to a financial adviser first. If you transfer all or part of your AVC fund to a drawdown plan you can normally take up to 25% of the amount transferred tax free. The income you take from the remaining fund will then be taxed and you could end up paying more than basic rate tax depending on how much money you take in each tax year. You can manage the income you take annually to minimise the amount of tax you pay each year. Annual management charges in your drawdown plan may be higher or lower than in the AVC. Accessing your AVC 9

10 Impact on your Annual Allowance If you take some or all of your AVC as a lump sum you will be subject to the Money Purchase Annual Allowance (MPAA) from that point. The MPAA for the tax year 6th April 2016 to 5th April 2017 is 10,000 and would apply to contributions that you, or someone on your behalf, makes in any tax year from the time you take your lump sum. If you exceed this limit the excess contributions will incur a tax charge. In addition, in the year the MPAA is exceeded, your annual allowance for any other type of pension plans you have, such as your main Teachers Scheme will be reduced by 10,000. Special rules applied for the 2015/16 tax year only, where the MPAA may have been up to 20,000 in certain circumstances. Next steps if you are interested in a drawdown plan If you are interested in drawdown please call our team of retirement consultants on the number in the Prudential letter who will be able to talk you through the options available to you. This can be a complicated subject and you can get more information about this by visiting Suzanne is 55 but is not ready to retire and wants to work part time as a supply teacher. Suzanne will need to take a substantial pay cut and therefore needs a way to supplement her income but is not ready to take her main scheme income. She does not want to buy an annuity or take a cash lump sum as she still has plenty of time to build up her AVC pot but she does need additional income and flexibility to alter it. After meeting with her financial adviser, Suzanne decides that drawdown is the right option for her. Alongside her adviser, Suzanne is comfortable regularly reviewing her investment choices as her needs change over the next few years. This means she can control the amount of money she takes from her drawdown plan whilst she is still earning a part time salary. As she decreases her working hours, Suzanne can then increase the amount she draws from her drawdown plan. Suzanne is comfortable with balancing the need for income with the investment risk. And she still has the flexibility to take an annuity later in life if she wants a guaranteed income for as long as she lives or take whatever is remaining in her drawdown plan as a taxable lump sum. All examples are for illustrative purposes only and do not recommend a course of action. The examples and tax information within this brochure are based on our understanding as at December 2015, of current taxation, legislation and HM Revenue & Customs practice and are subject to change without notice. 10 Accessing your AVC

11 3 Taking your money as a cash lump sum You have the option to take all or some of your AVC savings as a cash lump sum and you can do whatever you like with this. You can usually take up to 25% of each AVC withdrawal tax-free but it s important to know the remaining amount will be subject to income tax. If you are considering this option you need to think about whether you can fund your retirement for the rest of your life. There are no guarantees that your money will last. When you consider the amount of basic state pension could this keep you in the lifestyle you would like in your retirement? Key considerations: Health doesn t normally have any impact on the amount of money you can withdraw from your plan*. If you want to provide for a loved one both throughout your retirement and after you die then you will have to find a way to do this if you take your money as a cash lump sum. If you take a cash lump sum, you can use it in any way you choose, so you could use it to provide for your loved ones in the event of your death. Inflation means the spending power of the money you withdraw decreases over time unless you find a way to help safeguard against it. If you have several money purchase pension pots, in addition to your AVC, you may have the option to take some or all as cash lump sums depending on the rules of your scheme. You can usually take up to 25% of each AVC withdrawal tax-free and the rest will be subject to tax. If you decide to take some of your AVC as a cash lump sum and leave the rest invested then you will have reduced your fund. The amount of money you take over and above the tax-free element may impact the rates at which you pay tax on your income. * If you have a terminal illness where you re not expected to live for more than a year. If this applies to you please call us as you may be able to take your AVC fund entirely tax-free. Accessing your AVC 11

12 How will my money be taxed? If you choose to take your AVC fund as a cash lump sum then income tax will be deducted through PAYE. This will be done by using an Emergency Tax Code. This means that the payment will not take account of your actual tax position and you could end up overpaying or underpaying tax by a significant amount. HMRC will make any adjustment at the end of the tax year. If you think you have overpaid tax then you can contact HMRC directly and may be able to immediately claim a refund. For more information please visit Impact on your Annual Allowance If you take your AVC fund as a cash lump sum you will be subject to an additional annual allowance. This is called the Money Purchase Annual Allowance (MPAA). The MPAA will apply on any future contributions into an AVC. This does not apply if your plan value is less than 10,000 and you meet certain conditions, please read the next section. If you take your AVC fund as a cash lump sum and make future contributions of more than 10,000 into an AVC or any other defined contribution scheme that year or any subsequent year beginning 6th April, there is an annual allowance charge on the amount above 10,000. If you have any other type of pension, your annual allowance for pension savings into these will reduce by 10,000. Special rules apply for the tax year 6 April 2015 to 5 April 2016, where the MPAA may be up to 20,000 in certain circumstances. Do you have a plan that is 10,000 or less? If you have an AVC plan that is 10,000 or less then you may be able to take your AVC as a small pot. You ll be eligible for this if: > You haven t made any transfers into your AVC within the past 5 years > You haven t transferred any money out of your AVC in the past 3 years > You re not a director or connected to a director of a Northern Ireland scheme employer* If you re eligible for a small pot then slightly different tax rules apply. For plans under 10,000 we don t have to apply an emergency tax rate. You will still receive the first 25% of the payment from us free from tax, the balance will be taxed at basic rate. The MPAA rules will not apply. However, this may not reflect your personal circumstances and your actual tax liability may be higher or lower. For more information please visit If you think this might apply to you please call us on the number in the Prudential letter and we can talk you through the tax rules and how to access your money. This can be a complicated subject and you can get more information on this from the HMRC website at * This is only likely to apply if you do not work for a local authority. 12 Accessing your AVC

13 Taking Your Cash Malcolm is a teacher and is in the teachers final salary scheme (also known as a defined benefit scheme)this means when he chooses to retire his teachers pension scheme will pay him an income based on pensionable service and final salary. Malcolm also has a Teachers AVC. Malcolm is confident that he can maintain his standard of living using the income from his final salary scheme so he has decided to take the full AVC fund as a cash lump sum. Malcolm can take 25% of his AVC savings tax-free. The other 75% of his AVC fund is subject to tax. So taking his other source of income and AVC savings pot into account, Malcolm will pay an amount to the tax man within that tax year. The question called How will my money be taxed? (see page 12) explains that we have to apply an emergency tax code which is likely to mean the tax you initially pay will not take your tax position into account and you may have to claim back any overpayments. All examples are for illustrative purposes only and do not recommend a course of action. Next steps if you are interested in taking a cash lump sum You will need to call us on the number in the enclosed Prudential letter if you want to take all or some of your AVC fund as a cash lump sum. Accessing your AVC 13

14 4 A combination of all the options You can use your AVC pot to take a combination of the options and if you have more than one pension pot and an AVC you may want to use them in different ways and at different times. Taking a combination of options may not always be possible directly with Prudential and you may need to do this through a financial adviser. However, if you give us a call we can explain the options and what you need to do. Next steps if you are interested in taking a combination If you are looking to use your AVC pot to take a combination of the options, you need to call us on the number shown in the Prudential letter enclosed in this pack. 14 Accessing your AVC

15 5 Not ready to access your AVC savings? There may be a number of reasons why you are thinking about delaying taking your AVC benefits and it may be the right thing for you. However, it is important that you call us and let us know so we can make sure that you are aware of the impact of doing this. If you re not ready to access your AVC savings just yet, you may want to think about topping up your AVC and taking advantage of the tax relief*. If you are a basic rate tax payer, for every 80 you pay in the tax man will add another 20. If you are a higher or additional rate tax payer you save even more. The value of your fund could rise as well as fall and you could get back less than you paid in Total saved into your AVC pot Tax savings through tax relief Cost to you The above example is for a basic rate tax payer. If you are a higher rate, or an additional rate tax payer you could save even more. Tax relief is given through your payroll so there are no forms to fill in. * Even if you take all of your AVC benefits you can still take out a new AVC as long as you are a member of the Teacher s Scheme. If you take part of your AVC benefits you can also continue your contributions. However if you have: > transferred out part or all of your AVC to a drawdown plan and taken cash, income or a lump sum over and above your 25% tax free cash OR, > taken some or all of your AVC as a cash lump sum, any future contributions to the AVC will be subject to the MPAA (see page 12). The examples and tax information within this brochure are based on our understanding as at December 2015, of current taxation, legislation and HM Revenue & Customs practice and are subject to change without notice. Accessing your AVC 15

16 Your options at a glance This table compares and summarises some of the key considerations for each of the main options available. A guaranteed income for life Maintain control of your investment and have access to your money Taking your money as a cash lump sum Can I take 25%^ of my money tax-free? Yes Yes Yes What happens to the rest of my AVC (if I don t take a combination of options)? You convert it into secure income, for life. If you only take part of your money then the balance remains invested. Your AVC is transferred to drawdown and you draw an income directly from your fund. If you only take part of your money then the balance remains invested. If you take your entire AVC then you have control over it. If you take part of your money then the rest remains invested. Do I have a secure income for life? Yes No No Could I run out of money? An annuity will continue to pay your income for the rest of your life. Potentially Potentially Do I have to actively get involved in managing my money? No, not with a standard annuity. Yes Potentially What happens to my AVC when I die? You can select a Joint Life or a Guarantee Period option. If you don t then your income will stop. Your AVC is transferred into drawdown. You can nominate someone to have the remaining balance of the fund or an income. Any funds left in the AVC will be left to your estate. ^ You can usually take up to 25% of your money tax-free. 16 Accessing your AVC

17 6 Support for you and next steps We recommend that you use the impartial government guidance service, Pension Wise. Details of how to contact Pension Wise are on the next page. It is important to use all the support available to you so you can make informed decisions about your AVC savings. If you are considering using your AVC to buy an annuity or transfer to a drawdown plan you should use the enclosed information to shop around. There are different ways that you can shop around for example, you can obtain a range of quotes directly from different providers like Prudential or visit comparison websites such as the Money Advice Service website. If you need help understanding this pack in order to shop around, our team of retirement consultants are here to talk you through it. Whatever you decide to do with your money you will need to call us on the number on your Prudential letter. We can also let you know if you d be better suited to receiving financial advice and can give you options on how to do this, if you don t already have a financial adviser. The strength of Prudential At Prudential we re well placed to look after your money for the long term. We have been here for over 165 years despite uncertain economic times, stock market crashes, industry changes we are still here and we are financially secure. Seven million customers currently trust us to look after their money and we have built a wealth of experience in providing for your retirement. It s your journey and we are here to support you through it. Accessing your AVC 17

18 7 Useful sources of help Pension Wise are a free and impartial guidance service offered by the Government. They can help you with, understanding your options, what you can do with your pension pot, how to shop around and what to look for with taxes and fees. To find out how to book an appointment visit or call them on You can also contact The Pensions Advisory Service. The Pensions Advisory Service has been around for 32 years. Over these years, they have been helping people with their questions and issues about their workplace, personal and stakeholder pension schemes. Their service is offered on the phone, through live webchat, self-service online and through written enquiries. To find out more visit or call on If you are hard of hearing or speech impaired Prudential use Text Relay and Type Talk. If you are visually impaired we can provide braille, audio or large print versions of this brochure and other key documents to help you make an informed decision about your AVC savings. 18 Accessing your AVC

19 Notes Accessing your AVC 19

20 ANNB /2016