To AVC or not to AVC

dunstonh

Don't forget that typically the AVC fund also can provide for an additional cash some at retirement. As happened in my case the AVC pot was approx 25% of the whole pension value, I therefore effectively got back the whole of the investment with profits as cash, and had the main pension to provide just that;)

Thats only in a minority of schemes. Artha covers that in #8.

cyclonebri1

Fair enough, sorry to repeat, hadn't seen that post. Didn't realise the situation was minority case tho', my experience being my own pension scheme and that of a mate also recently retired, both schemes calculated in the avc pot for lump sum purposes:T :T :T :T , which is a no brainer.;)

dunstonh

cyclonebri1 wrote: »

Fair enough, sorry to repeat, hadn't seen that post. Didn't realise the situation was minority case tho', my experience being my own pension scheme and that of a mate also recently retired, both schemes calculated in the avc pot for lump sum purposes:T :T :T :T , which is a no brainer.;)

Yes, when the AVC can be used in conjunction with the main scheme with regards to lump sum calculation it is a clear advantage and a no brainer as you say. The other time is if the employer gives matched contributions.

Either of those are minority cases but they do exist and need finding out before making a decision. Without those though, AVCs are obselete and restrictive compared to other options.

Dick_here

My question on this - to which there seems to be no definite answer - is whether it is better for me to increase my company pension scheme contributions (I can pay 7% for 60ths instead of 5% for 65ths) or increase my AVCs ? They are with Standard Life, also paid through the company via my salary. If I was to switch to 7%, I'd probably have to stop paying the AVC which is currently £30pm. It is now a Career Average company scheme. Any thoughts ?

david78

You need to look at the pension you would get from the £30 p.m. AVC (there should be an estimate on your statements) and compare with the extra pension you get by paying 7% rather than 5% for your future contributions.

E.g. if your career averaged salary was £20k, then paying 7% instead of 5% means
you pay in a extra £400 each year (on average) or £33 per month. For this you get an extra annual pension of (1/60-1/65)*£20k = £24.64 for each further year of employment. Not great.

Dick_here

david78 wrote: »

You need to look at the pension you would get from the £30 p.m. AVC (there should be an estimate on your statements) and compare with the extra pension you get by paying 7% rather than 5% for your future contributions.

E.g. if your career averaged salary was £20k, then paying 7% instead of 5% means
you pay in a extra £400 each year (on average) or £33 per month. For this you get an extra annual pension of (1/60-1/65)*£20k = £24.64 for each further year of employment. Not great.

Many thanks. But the extra £400 per year isn't quite that as I'm already paying £30 into the AVC monthly, which would stop.

My career averaged salary will be at least 35k as we've only recently switched from Final Salary and those accrued benefits are protected.

It's the fact of a more guaranteed amount as opposed to the AVC which will be relying on the stock market ups and downs more directly, I guess.

The other thing I forgot to mention is that the company scheme uses salary sacrifice, so I'll have an extra £50 per month going in (rising in line with salary), whereas currently I'm paying £30 to the AVC but also paying income tax on it.

Does all that alter things much ?

david78

It's a close call. But paying the £30 p.m. to fund a bit more FS pension probably wins over the AVC option. The saving in national insurance helps too.

The only thing you will need to watch is once you commit to the higher payment to the FS scheme you are stuck with it, whereas you could stop/start the AVC payments if you needed to.

cyclonebri1

!!!!!!_here wrote: »

Many thanks. But the extra £400 per year isn't quite that as I'm already paying £30 into the AVC monthly, which would stop.

My career averaged salary will be at least 35k as we've only recently switched from Final Salary and those accrued benefits are protected.

It's the fact of a more guaranteed amount as opposed to the AVC which will be relying on the stock market ups and downs more directly, I guess.

The other thing I forgot to mention is that the company scheme uses salary sacrifice, so I'll have an extra £50 per month going in (rising in line with salary), whereas currently I'm paying £30 to the AVC but also paying income tax on it.

Does all that alter things much ?

I didn't think you paid income tax on AVC contributions?, or has that changed?

Dick_here

david78 wrote: »

It's a close call. But paying the £30 p.m. to fund a bit more FS pension probably wins over the AVC option. The saving in national insurance helps too.

The only thing you will need to watch is once you commit to the higher payment to the FS scheme you are stuck with it, whereas you could stop/start the AVC payments if you needed to.

Thanks again.

We do actually have an annual choice as to which pension contribution to pay too

Dick_here

cyclonebri1 wrote: »

I didn't think you paid income tax on AVC contributions?, or has that changed?

Good point, I'm not sure now you mention it ! Anyone ?