Benefits at retirement

There are various ways in which you will be able to use your AVC fund to buy extra retirement benefits when your BTPS benefits become payable. For example, it may be possible to take some, or all, of your AVC fund as a tax-free cash lump sum depending on your individual circumstances. Any funds that are not taken as a tax-free lump sum will be applied by the Trustee to purchase an annuity for you, and/or your spouse or civil partner, from an insurance company on the open market.

HMRC allows you to take 25% of the capital value of your total BTPS benefits, including AVCs, as a tax free cash sum, capped at a quarter of the standard lifetime allowance.

Open Market Option
Any part of your accumulated AVC fund that is not taken as part of your tax-free lump sum will be applied by the Trustee to purchase an annuity from an insurance company, on the open market.

If you need assistance in deciding how to use your AVC fund, you should contact an independent financial adviser.

Benefit Limits
There is no HMRC limit on the amount of retirement benefits (i.e. pension and lump sum) you can build up during your working life. However, if the total value of your retirement benefits from all sources (i.e. BTPS, AVCs, Freestanding AVCs, past employers’ registered pension schemes or Personal Pension arrangements) exceed the Lifetime Allowance, you will be required to pay a Lifetime Allowance Charge. The Lifetime Allowance for the 2011/12 tax year is £1.8m, although will reduce to £1.5m from April 2012.

Recycling of pension commencement lump sums
HMRC has introduced complex rules to prevent the systematic exploitation of the tax rules that involve members withdrawing the tax-free lump sum at retirement (known as the pension commencement lump sum) and which is then reinvested back into a registered pension scheme, automatically generating further tax relief on the amount invested. This in turn allows a further tax-free lump sum to be paid out, and is known as recycling. HMRC may treat substantial payments paid into the pension scheme before retirement as an attempt to recycle the pension commencement lump sum.

The tax payable on the amount that is deemed to have been recycled is 55% of that payment.

Frequent questions

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