AVC - Is it too late?

Woodpecker_3

I am in a local government pension scheme and at 55 years I am wondering if I should pay in to the AVC scheme they offer. Is it too late for it to be really worthwhile? I wonder if my investment would have time to grow. Also there is always the worry of rendundancy and early retirement which could mean there would be less than 5 years.

MikeJones_2

Hi Woodpecker,

Woodpecker wrote: »

Is it too late for it to be really worthwhile? I wonder if my investment would have time to grow.

Assuming you are a Basic Rate Taxpayer, you receive £20 tax relief for each £80 contribution you make (i.e. your gross contribution would be £100 for every £80 YOU pay into the AVC). In this respect a money purchase type AVC is a reasonable investment vehicle to help build up part of your retirement income.

This is especially true if you intend to take a lump sum at retirement as the AVC might be a good way to draw any additional cash lump sum over and above that which you may receive automatically, if (as I suspect) you are entitled to a pension plus cash lump sum at retirement.

If you are a Higher Rate Taxpayer, the AVC situation is even more favourable.

Because you have mentioned the possibility of redundancy/early retirement, and that this may obviously affect your situation, you really ought to see an IFA as there are other investment vehicles, perhaps more flexible but not as tax efficient, that should be considered in light of these concerns of yours.

Mike Jones
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I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I have previously been an Independent Financial Adviser specialising in employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser.
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Jennifer_Jane

I'm 61 and possibly a year away from retirement.

I'm a 20% tax payer and will be on a very small pension eventually and without a full Basic State Pension.

I have just increased my AC's to 30% of salary and put the money into a cash fund within the AC wrapper. To me this was the best way to save money for retirement as it clearly gives an instant 20% return even without accounting for any return from the cash fund, and with the ability to take 25% of the pension pot as tax-free cash. So, to answer your question, I do not believe it is ever too late, so long as you put the money into an appropriately safe fund within the AC. Better than paying off the mortgage, better than any ISA etc - although of course once the money has come off your gross salary it is locked until retirement.

Hope this helps.
Jen
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aHullKingstonRover

Hi,

I'm no expert and I personally think it's never too late to invest but I think there are two fundamental questions here;

The first question is what percentage contribution of your salary do you intend to make e.g. a £20,000 salary on a 1% contribution would be £200 per annum but a 10% contribution would be £2,000 - multiply these by your estimated 5 years remaining at work and you'd have £1,000 and £10,000 respectively - vastly different fund sizes.

The second question is what does your AVC comprise? I understand that timimg is crucial when deciding to take your pension. So, is the AVC Stock Market based, a cash deposit fund or can you choose to make contributions between the two? Share based investments will likely incur management charges and given the current volatility of the Stock Markets both home and abroad, is the fund likely to rise suffuciently over the next few years to make a decent profit? Equally, would investing into a cash AVC at a guaranteed rate of say 5% per annum actually be more beneficial given the short period of time you have left to work? Timing would be less crucial on a cash fund but on a wholly Stock Market based investment you might actually receive less back than you invested, even with the enhanced tax benefits that AVC's provide.

Many large organisations produce literature to help you decide about the best way to inves in a AVC or maybe there is a pension officer who can offer advice?

Good Luck!

scrivette

If you did take an AVC with your employer you would not have to pay any administration benefits as you would be using the In House AVC scheme.

You will not have to pay tax on your pension contributions.

At Retirement Age you would be able to take the AVC fund as a tax free lump sum (providing it does not exceed 25% of your total pension benefits). Alternitivly you could leave your AVC Fund up until at least age 72, giving it time to mature (but without making additional contributions) and then you could use it to purchase an annuity (pension) and you could take 25% of the fund as a tax free lump sum.

EdInvestor

scrivette wrote: »

At Retirement Age you would be able to take the AVC fund as a tax free lump sum (providing it does not exceed 25% of your total pension benefits).

This is the only real reason to use an AVC these days, but you must check that scheme rules allow the AVC to be taken in cash - often they don't.

How much pension income (incl state pensions) are you expecting in retirement? The tax threshholds can mean it is more tax efficient to use an ISA for additional savings.The investment scenario is the same.