The Teachers AVC Tax Trap

The Teachers’ AVC is a money purchase pension that is provided by Prudential to help teachers top up their retirement savings.

One of the advantages a money purchase pension usually has over the main Teachers’ Pension Final Salary or Career Average Schemes is that the pension pot can be passed on, free of any inheritance tax to whoever the plan holder nominates with its value paid outside of the holders estate.

However due to a strange quirk with the Prudential plan, the Teachers AVC does not allow nominations. When a member dies, the value of the AVC is paid directly into the holder’s estate. This means that any pension savings that normally would be exempt from inheritance tax becomes fully taxable potentially at up to 40% if the holders estate exceeds their available nil rate bands (tax free allowances).

This can be seen on page 11 of the Prudential Teachers’ AVC Key Facts document.

The inheritance tax nil rate band has been frozen at £325,000 for an individual since the 2009/10 tax year and will remain frozen until at least 2026. Some people are eligible for up to an additional £175,000 residence nil rate band where their main residence is being passed to direct descendants such as children or grandchildren on their death. This figure has also been frozen until at least 2026. This means with inflation and rising property prices many more ordinary people are facing the possibility of an inheritance tax liability due to fiscal drag.

Use the short form on the right to contact us for a friendly initial discussion with an adviser – without any obligations.

Frequently Asked Questions

We can provide advice on moving your Teachers AVC to a more modern pension that will allow you to get your AVC savings out of your estate straight away for inheritance tax purposes, direct your death benefits where you choose as well as providing you with ongoing independent advice on your Teachers Pension as well as your other savings and investments.

This doesn’t just affect the Teachers AVC it will likely also affect some other older pension contracts. When the AVC product was designed and released in 1994, far fewer people would have had potential inheritance tax issues than today – mainly due to increases in house prices and tax thresholds being frozen.

Having pension savings that are included in the value of the estate clearly makes the issue worse for those whose estate will be above their available nil rate bands.

The decision to only pay into the estate is a strange one because most money purchase pensions allow you to nominate where the benefits go and keep the proceeds outside of the estate for inheritance tax purposes. It is likely the decision was made to keep things simple by having a default payout rather than having the member complete a nomination, without thinking of the potential future tax consequences.

It might not be an immediate problem for you now, but it could be significant in the future.

By having a 10-15 minute chat with us today we’ll be able to give you an indication as to whether it’s an issue now or if it’s likely to be in the future.

Even if it’s not a problem now, you might find that an alternative arrangement suits your needs better.

Even if you are young, your family could still face potential tax issues if you were to die suddenly – especially if you have an unmarried partner and / or children and don’t have a will in place.

We can help you to future proof your finances in case the worst should happen, and if required keep any plans under regular review.

Initially we’ll need to get some more information about your situation. We’ll have a chat for 10-15 minutes and we’ll be able to give you an indication of any potential issues and the likely costs to put things right.

If you’d like to take things further, we’ll complete a questionnaire and ask you to sign an authority form to gather more information from Prudential (and possibly other providers) and our Terms of Engagement. This will take around 3/4 weeks to get a reply.

Once we have this back, we’ll put together a written report with our recommendations for you which will include a full breakdown of costs  as well as highlighting any advantages or disadvantages of that recommendation.

The costs to you will depend on the work that we do – they will likely be a small fraction of any potential tax saved but until we know more about the work we will be doing it is hard to give firm figures.

Once we know the work involved, we’ll be able to give you a breakdown of costs and we’ll fully breakdown these down in your suitability report.

Advice costs relating to a specific pension scheme can be deducted from the pension as a charge – this can save you both VAT and provide income tax relief on the cost.

This is because is if a new product is being recommended (so intermediation is taking place) there would be no VAT due.

Our current Terms of Engagement can be found here.

Yes there are a number of potential benefits to moving your AVC, here are just a few:

  • Consolidation of the With Profits Terminal Bonus – this is the extra part of the pension that is described as non-guaranteed
  • Inheritance Tax savings and ability to direct death benefits where you choose.
  • Increased fund choices including a greater choice of lower cost passives, ethical funds or more sophisticated portfolios
  • Access new flexible access drawdown (this is not offered in the AVC)

There are potential drawbacks but in terms of risk the investment risk should be no different from the existing AVC unless you choose to amend the risk.

The main drawbacks of switching your Teachers AVC are as follows:

  • Contributions would not be deducted by payroll from your salary – the monthly contributions would have to come out of your bank account each month.
  • If you are or become a higher rate taxpayer, you’ll need to tell HMRC that you are making additional pension contributions so they can apply your extra tax relief.
  • The government could change the rules.
  • An MVR might apply on transfer out which could cause loss of regular and/or terminal bonuses and some individuals may be invested in the unit linked rather than with profits fund so this wouldn’t be relevant? (please see page 7 of https://www.pru.co.uk/pdf/TAVK0789.pdf). In this case it might not be suitable to move your pension.
  • Inheritance tax may still be an issue if you are in poor health and die within 2 years of the transfer. We will ask about your health when assessing suitability.