AVC advice please

artha

Looking for some advice/opinion on my possible retirement situation with particular reference to my AVC situation. I hope that there also may be some learning for those younger than me in the certain knowledge that if I had known several years ago what I know now (thanks to this site) I would have managed things better. Sorry in advance for the long post but it may save further questions and a long thread.

The company AVC is a group money purchase scheme that now invests in Standard Life products and works alongside our main pension scheme
I am invested in:
Standard Life With Profits Fund
Standard Life Millennium With Profits Fund (replaced the With Profits Fund)
Standard Life Stock Exchange One Fund

I have been paying into the AVC for 14 years as I had always had in mind a target early retirement age of 55-57. (In the last twenty years most people have gone at that age with "arranged" voluntary severance. At 55 severance reaches a maximum of 24 months salary which tails off after that. At 58 I will still get about 18 months).

An IFA advised the funds to invest in at that time. What of course(?) was not known at that time was that SL would heavily penalise(MVR/MVA) early leaving (i.e before age 62) of my With Profits or transfer to another SL fund (disgracefull?)and that my Pension One Stock Exchange fund units would be at a very low value in the current climate.

With the possibility of early retirement + voluntary redundancy I asked our HR dept for an estimate of retirement/severance benefits for 1/8/09 at which time I will be 58 and have 30 years service in a final salary scheme. Normal retirement age is 62 but age 60 is used to calculate benefit reduction for early retirement on main scheme (not sure about the AVC)

My main scheme pension would be ~ £19K index linked up to 3%(fairly comfortable given that I will have with my potential redundancy pay and savings about 150k+ cash, no mortgage and a younger wife working for at least another 4-5years but with little occupational pension). We both will get full basic state pension. Given those circumstances I see no reason to take any cash free lump sum from my pension given a CR of ~14. I am allowed £65,257. Agree?

With recent changes (A day)I therefore see my AVC as a source of tax free cash to boost the reserves thereby maximising the return on the investement that was quite significant given the salary i was on 14 years ago. The buy back rate is about 22:1 for AVC funds at age 58and does not seem efficient. Rates change according to age and service

The written quote I received from HR Dept is quite lengthy but here is the paragraph relating to AVC:

"You will be informed of the exact value of your AVC fund shortly after your retirement. You have the option of purchasing an annuity with your fund on the open market, or you may buy extra pension within the company pension fund. Your AVC fund value as at March 31st 2008 stood at 24,705.20, which at current rates and assuming pension increases of RPI to a maximum of 3% per annum, would convert to £1,137.96 in the company pension fund and 50% widow/ers pension. If you would prefer to have your AVC's calculated on a single member basis or with different annual increases, then contact me for further details. You should note that AVC conversion factors are subject to regular change. You may, if you so wish, take all or part or all of your AVC's as a tax free cash lump sum providing that the total amount, including any tax free cash taken as in paragraph 3 does not exceed 25% of the cash value of your total benefits"

Not knowing the value of my fund until after retiring worried me so I sought a current valuation from HR. AS far as I can see the value of my fund at the moment if I were to take it or switch to another fund, after a further input since march of £1000, of £21,996. Reduction in value is part MVA/MVR of WP and part stock market values.

According to statements I have therefore put in about £18,500 over 14-15 years to get a return of £22,000. Even though I’ve been getting tax relief I would probably be in no worse situation cash wise had I been putting this money into a cash deposit account?
The learning here, in my opinion, for younger investors is that advice relating to investements being a long term (i.e. >5-10 years) is not the full picture. Timing is everything as speculators on the stock market know only too well. You can invest for a long time but still lose if you are not in control of when you have to take your investement

My instinct says that I have the following easy(?) options:

1.Stop paying money into these funds immediately and any further similar level contributions (£125/mth) should go into the Standard Life Sterling Fund (ie a cash fund). Bite the bullet and take the avaialble tax free cash in August. The stock exchage fund may have improved by then or the converse. Write it down to experience and live with it

2. As 1 but put the maximum I can afford each month (£1000 -£1500) into the Sterling fund until I retire and get a good (?)tax free investement in the short term provided I am granted voluntary redundancy next year (not certain)

3. as 1 but leave it till I'm 62 and take it as pension buy back after the recession (we hope)

4 as 2 and leave till 62

Phew!

Any opinions/comments/advice relating to my situation or others that find themselves in a similar position?

dunstonh

I have been paying into the AVC for 14 years as I had always had in mind a target early retirement age of 55-57.

Why did you choose an AVC to hlep provide for early retirement? AVCs were one of the worst options to choose for that basis.

What of course(?) was not known at that time was that SL would heavily penalise(MVR/MVA) early leaving (i.e before age 62) of my With Profits or transfer to another SL fund (disgracefull?)and that my Pension One Stock Exchange fund units would be at a very low value in the current climate.

Whilst I am not a fan of with profits, they do attact more negative views then deserved. MVAs are not disgraceful. They are common sense. You are not in a guaranteed fund. You are in a fund that offers a level of security at the selected retirement age. Not before. If the underlying assets of the fund have dropped say 20% then its only right that those taking money out at that point should be penalised. The exception being those where it was knonw money was likely to be withdrawn as the provider can prepare for those well in advance.

My main scheme pension would be ~ £19K index linked up to 3%(fairly comfortable given that I will have with my potential redundancy pay and savings about 150k+ cash, no mortgage and a younger wife working for at least another 4-5years but with little occupational pension). We both will get full basic state pension. Given those circumstances I see no reason to take any cash free lump sum from my pension given a CR of ~14. I am allowed £65,257. Agree?

Have you factored in the increased taxation you will face from age 65 by the loss of your age allowance? Or will your total income be so much that you will lose your age allowance regardless of the lump sum taken or not?

According to statements I have therefore put in about £18,500 over 14-15 years to get a return of £22,000. Even though I’ve been getting tax relief I would probably be in no worse situation cash wise had I been putting this money into a cash deposit account?

That £18500 includes tax relief. So, your net contribution would have been lower. You are also looking at the value at one of the worst times possible. A savings account would have been a lower amount.

The learning here, in my opinion, for younger investors is that advice relating to investements being a long term (i.e. >5-10 years) is not the full picture. Timing is everything as speculators on the stock market know only too well. You can invest for a long time but still lose if you are not in control of when you have to take your investement

Not really. The learning here is that you dont remain in the stockmarket or other volatile invesmtents right up to the point you want to retire. You should have been phasing down the risk at least 5 years ago. Moving more and more into the cash fund for example. Many modern contracts do this automatically or servicing IFAs will do it. However, where the product doesnt do this or you dont have a servicing IFA then you will take responsbility for doing it yourself.

My instinct says that I have the following easy(?) options:

You have more options than you have listed. However, they are starting to get too specific and would depend on your personal circumstances as to what is best.

EdInvestor

If it is your plan to take an annuity with the AVC eventually, then putting the money into gilts would provide a better match than cash.

Jennifer_Jane

artha wrote: »

According to statements I have therefore put in about £18,500 over 14-15 years to get a return of £22,000. Even though I’ve been getting tax relief I would probably be in no worse situation cash wise had I been putting this money into a cash deposit account?
The learning here, in my opinion, for younger investors is that advice relating to investements being a long term (i.e. >5-10 years) is not the full picture. Timing is everything as speculators on the stock market know only too well. You can invest for a long time but still lose if you are not in control of when you have to take your investement

1) Just to add here, that you cannot compare the performance of £18,500 paid in OVER 14-15 years against having invested £18,500 14 years ago as a lump sum. Your last monthly amounts have not had time to grow yet (but you will have been buying them cheaply).

2) Earlier this year, I moved my own AC's from European Equities and Emerging markets to Gilts, saw that the performance (I check the performance of all the funds, not just the ones I am in, very, very frequently - at least weekly!) was declining, and then in July moved to cash. Had I not been retiring next August, I would have put new investment into equities to buy cheaply, and kept the existing money in cash, until the markets looked more optimistic. Cash is the only fund in our scheme which is showing a positive return. Not gilts, not bonds.

I think the learning is more to keep a close check on what's going on both with your own money and with the economy/finance in general - and get advice, as often as is possible.

It's sad and unfortunate that these days, everyone needs to be responsible for their own financial portfolio, so it's best to stay watchful.

Regards
Jen
x

artha

EdInvestor wrote: »

If it is your plan to take an annuity with the AVC eventually, then putting the money into gilts would provide a better match than cash.

When I started the avc the intention was to buy pension from our company fund to boost my pension when retiring early (if I could). Since the A day changes and the fact that my salary has increased a lot (giving what I think is a good pension relative to my needs) I don't see a need to buy more pension and would rather have the cash to save/ use for extras/luxuries like holidays, new car, daughters wedding etc (i.e adding to the funds I already have saved for those purposes)

EdInvestor

artha wrote: »

You may, if you so wish, take all or part or all of your AVC's as a tax free cash lump sum providing that the total amount, including any tax free cash taken as in paragraph 3 does not exceed 25% of the cash value of your total benefits"

This looks like the best way forward. Looking at the overall big picture the AVC is a smallish part of the total and the MVR will not have much of an impact even if you leave early.

So aim to get all the AVC money out as tax free cash.

artha

EdInvestor wrote: »

This looks like the best way forward. Looking at the overall big picture the AVC is a smallish part of the total and the MVR will not have much of an impact even if you leave early.

So aim to get all the AVC money out as tax free cash.[/font][/size][/color]

This is what feels best to me despite the fall in value of the investements by about £5k since its high value last year before the stock market demise. As you say it is a small part of the total but I naturally want to maximise the benefit. Hence the thought of stopping payments into both existing funds and putting as much as I can afford into a cash fund over the next 8 months, getting tax relief and then taking it back as tax free cash to save or invst for the future whatever that may bring. The WP fund and its penalties are what they are and the stock exchange fund might improve over the next 8 months. If they go down I've taken a gamble and lost but it's not going to leave me destitute!

Thanks for your opinion

artha

Why did you choose an AVC to hlep provide for early retirement? AVCs were one of the worst options to choose for that basis.

At the time I spoke to the IFA that knew the company, its pension fund, AVC scheme and knew that most people tended to go at 55-57 under the contractual voluntary severance scheme. I explained that if I got the opportunity I would take severance and retirement at no later than 57 so needed something to boost my package at 57. I realised that as I hadn,t joined the company until age 28 and with no previous Occupational Pension I was looking at a shortfall in my retirement income possibilities He assesed my risk and determined I was "medium" and recommended WP and Stock exchange 50/50. We reviwed the position 4 years ago when I had the opportunity to take severance and early pension. He then said that AVCs were a waste of time/money. Recommended that I left the company, took the maximum cash (which he would invest), get another job but leaving me with a pension of only £9K. I was uncomfortable with this and decided to stay for a few years more until the opportunity came again. With what I know now and surely he knew he should have suggested that I move my AVCs into a safer environment with only a few years to go. He didn't. I am glad that I didn't go at the time as my experience and knowledge became so valuable that my salary has impoved significantly to now give me a pension of 19k.

Whilst I am not a fan of with profits, they do attact more negative views then deserved. MVAs are not disgraceful. They are common sense. You are not in a guaranteed fund. You are in a fund that offers a level of security at the selected retirement age. Not before. If the underlying assets of the fund have dropped say 20% then its only right that those taking money out at that point should be penalised. The exception being those where it was knonw money was likely to be withdrawn as the provider can prepare for those well in advance.

Point taken and I can understand this. The disgraceful comment was a question and lifted from another reliable poster. The point was that Satndard Life are imposing much bigger penalties than other providers

Have you factored in the increased taxation you will face from age 65 by the loss of your age allowance? Or will your total income be so much that you will lose your age allowance regardless of the lump sum taken or not?

Not sure that I understand this ? Would I therefore be better taking the enhanced pension before 65 to minimise loss of age allowance. Ther would be income that I wouldn't use and have to put into savings. My only other income at 65 extra to Oc pension and state pension would be interest on savings. I have tried to minimise my exposure to taxable interest by maximising in cash ISA for both myself and wife and putting other savings in my wifes name ( we've been together for thirty+ years and I'm sure don't intend parting until death) to currently avoid my 40% liability. My wife earns 21k and has little occupation pension coming so there is plenty of headroom

That £18500 includes tax relief. So, your net contribution would have been lower. You are also looking at the value at one of the worst times possible. A savings account would have been a lower amount.

Again point taken. My real contribution I calculate now as ~ £15,000, so return even at this stage is not a loss. Just kicking myself for not moving it before the crash. But then again I didn't know the crash was coming

Not really. The learning here is that you dont remain in the stockmarket or other volatile invesmtents right up to the point you want to retire. You should have been phasing down the risk at least 5 years ago. Moving more and more into the cash fund for example. Many modern contracts do this automatically or servicing IFAs will do it. However, where the product doesnt do this or you dont have a servicing IFA then you will take responsbility for doing it yourself.

Another point taken but my IFA didn't warn me that I should be doing this. It now seems so obvious that I've given my self another kick (quite bruised now) I hope anyone else reading this will learn a lesson. Having said that the stock market was at a very low point five years ago and moving out would have left me in a similar position as now. What I should have done is moved out of the stock market a year ago when values had recovered to a reasonable high

You have more options than you have listed. However, they are starting to get too specific and would depend on your personal circumstances as to what is best.

AS I've posted to a different reply, I think, as I could possibly be going in 8-9 months time, I should stop paying into existing funds, take the hit on WPand leave till August and withraw as cash, leave the Stock Echange fund and gamble on a recovery taking place and withdraw as cash and put any further conributions in as Stering One fund i.e a cash fund. I have currently got used to saving £1000 - £1500 as this leaves me with what I will retire on in terms of pension on which we mange comfortably. I plan to put the £1000-£1500 which I've been putting into savings into the AVC cash fund and withdraw it as tax free cash in 8 months time.

Is there any major flaw in my thinking? I realise that there may be better options that someone could suggest but surely this is a reasonably safe option in the short term? I will not hold anyone responsible for any assurance if some major unforseen event scuppers this plan
[/quote]

EdInvestor

Both you and your wife will have a tax free age allowance of c.10k from 65.So don't watse your wife's allowance. How much state pension will your wife get? Enough to use up her allowance?

The age allowance clawback kicks in at 21,800, after which you lose income @ 33% tax until you get back to the normal personal allowance level.

It's a pity most advisors only look at tax while you are working, never after you retire. The result is people often end up with way too much pension income, all in one name, with wasted spouse allowances on one side , and age allowance clawback on the other.

artha

EdInvestor wrote: »

Both you and your wife will have a tax free age allowance of c.10k from 65.So don't watse your wife's allowance. How much state pension will your wife get? Enough to use up her allowance?

I thought it currently stood at about 9k ?
My wife (currently 54 and in the Teachers Pension Sheme since 2004) has a SP forecast of 6k. We believe she may have some occupational pension from ICI + NHS for age 18 to 24 which we are currently trying to trace.

The age allowance clawback kicks in at 21,800, after which you lose income @ 33% tax until you get back to the normal personal allowance level.

Let's say that at todays values I have a combined OP and SP of 24k. That means I am 2.2k over and will sacrifice 1.1k of allowance paying an extra £240 tax a year. Is that correct?

EdInvestor

artha wrote: »

EdInvestor wrote: »

I thought it currently stood at about 9k ?

Yes, but it will rise to around 10k over the next couple of years.

Let's say that at todays values I have a combined OP and SP of 24k. That means I am 2.2k over and will sacrifice 1.1k of allowance paying an extra £240 tax a year. Is that correct?

Age allowance clawback - the details