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.
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