Flexible Option AVCs

amc1

I don't really understand what these provide but...

"These contributions provide you with additional defined benefits based on your Final Pensionable Salary. You can pay a fixed percentage of your Pensionable Salary to the scheme on top of your regular contributions so that you can:

- increase your pension at normal retirement date and/or
- increase the benefits payable to your dependants on death in service and/or after you retire."

I have just had a communication from my FS pension scheme to say this option will be closed to new contributors and existing contributors will not be able to increase their contributions after March 2006.

Can someone kindly explain what this type of AVCs mean in laymans terms (examples would be great) and is this something I should be getting into whilst I am allowed to ? I am 38 with 20 years service in a 60th FS pension scheme.

Thanks a lot.

dunstonh

There is no product class called Flexible Option AVCs. It sounds more like a marketing name.

AVCs are basically a dead product now. There is little reason to consider one unless your employer makes extra contributions to it or you have access to a decent fund range on really low charges.

AVCs can be very restrictive as they do not allow for early retirement (before scheme commences) or later retirement if you are phasing your retirement. This is where the Free standing AVC was, in theory, meant to come into play.

Nowadays, and more so from April 06, ISAs and personal pensions will relace them as they are generally the better option.

As a product, the passing of AVCs/FSAVCs will not be missed.

Debt_Free_Chick

Dunstonh

According to the OP this AVC scheme provides "additional defined benefits". Whilst we don't have full details, it could be the type of AVC that removes the annuity risk from the member, so it might be worth looking into.

amc1
You were probably given details of the scheme with your original joining pack or details could be in the pension scheme booklet. You need to get full details of the scheme and post them here, as this scheme is likely to be unique to your occupational pension scheme. As dunstonh said, it's not a common term and sounds "scheme-specific".

We need more details, especially as to the type of benefits that these AVCs will secure.

dunstonh

"defined benefits" being the key point DFC. I missed that before. Good spot. Defined benefits would indicate that your contribution would not be performance related (i.e. not fund based). That could be a good option depending on the rest of it.

Personally, I have not come across a defined benefit AVC plan before.

amc1

Hi, more info.

There seems to be two types.

i) Added Pension. In return for an additional contribution each year (payable monthly as a fixed percentage of your Pensionable Salary), you can increase your pension at your Normal Retirement Date by a set proportion of your Final Pensionable Salary. The table below illustrates the benefit you can purchase each year through paying an additional contribution of 1% of your Pensionable Salary. The benefit is determined by reference to your current age and your Early Retirement Age, which is set out in Appendix A to your booklet. (A spreadsheet calculator tool to help you estimate your prospective pension).

If you leave the scheme before your NRD, you will be credited with the additional % of your Pensionable Salary you had purchased to date. This will include a 50% dependant's pension if you die before retirement after leaving the scheme.

If you die in Pensionable Service, the contributions you have paid to provide this extra benefit will be paid as a lump sum. On death after retiring, a dependant's pension will be payable equal to 50% of the additional percentage of the Final Pensionable Salary you had purchased.

ii) Additional Dependant's Pension on Death after Retirment. In return for an additional contribution (payable monthly as a fixed percentage of your Pensionable Salary), you can increase the pension benefit payable to your dependant when you die after retiring on or after your NRD. ............

I'll post anything more I can find.

dunstonh

The "Added pension" looks more like buying of added years rather than an AVC in the conventional sense.

That section you typed out (bet that was fun ) appears to suggest it is a very good option and should be considered. In effect, you are guaranteeing x% of your final salary by adding a contribution of y% pa.

The next thing that would need to be checked is how much x% is going to be from your y% contributions. Does it cost a lot to get a little or vice vesra? Appendix A would be the next place to look with that calculator tool to help.

amc1

For type i) "Added Pension" and assuming a Pensionable Salary of £20k.

Contribution Rate 1%
Monthly Cost (Gross) £16.67
Added Pension at ERA as a % of Final Pensionable Salary (FPS) 1.48%
Added Pension at ERA (on current Pensionable Salary) £296.00 pa

For type ii) "Additional Dependants Pension on Death After Retirement" and assuming a Pensionable Salary of £20k.

Contribution Rate 1%
Monthly Cost (Gross) £16.67
Added Pension at ERA as a % of Final Pensionable Salary (FPS) 6.45%
Added Pension at ERA (on current Pensionable Salary) £1,290.00 pa

dunstonh

So for 1% you will get 1.48% added pension based on your final pensionable salary, which increases (over time). Seems like a very good option. Something you should look at before they pull it. A personal pension (of any sort) or ISA would struggle to come close on that.

amc1

Thanks a lot. I thought it looked like a good option. My question is... If I continue with my company and if they continue with their Final Salary scheme for another 20 years I will have 2/3 salary as pension. Shouldn't that be more than enough for me to live on without even needing to think about AVCs. What do you think ?

dunstonh

2/3rds is fine. Even better if you have built up lump sum savings/investments as well.

Remember income pays the bills but it is capital that you will use when you need to replace that car in retirement or the boiler, do the travel thing etc. You need those lump sums as well so dont forget that.

I should add that you could have aims and goals for retirement that cost you more than you earn currently. 2/3rds wouldnt be enough then. 1/3rd could be enough for some people, others need an increase.

There is a bit of a joke in Norfolk, where wages tend to be very low that when someone retires and gets the state pension, they get a pay rise.

If you think 2/3rds is enough for you, then that is good enough.

amc1

I have until the end of March to make a decision on this - after that the option will not be available. The Final Salary scheme I have twenty years service in is being drastically overhauled (past service unaffected) and is looking much less attractive going forward.

I am thinking about going for a 2% Flexible Option AVC which would give me 2.88% added pension as % of Final Pensionable Salary. I have approx. 22 years service to go.

Is this a good rate of return or should I invest the 2% elsewhere.

Many thanks.