AVCs vs Personal Pension

adamthepub

Hi,

My employer has just announced that they will close their AVC scheme to new contributors in April, while existing contributors may contunue to do so. I had vaguely planned on starting AVC contibutions later in the year but now understand that I either need to start early or make a private arrangement to contribute to a new personal scheme.

In general, what [if any] factors would make me better off starting the AVC scheme while I can vs starting contriutions to a new private pension. What questions should I be asking my employer about their AVC scheme to help make my decision? My guess would be that the AVC route would offer lower fees while the personal pension route may be better if I end up changing jobs fairly soon.

Thanks in advance for your thougts and sugestions.
Adam.

dunstonh

Only reason really for you to consider an in-house AVC (rather than a FSAVC) is if the employer offers any incentives on it. Otherwise, it will offer nothing that will benefit you which cannot be found on other pension products. This is the main reason it is being removed as a product post April 2006.

Fees are often lower than personal pensions, although there is not much in it nowadays and some personal pensions would beat some AVCs. AVCs will also often have a limited fund range and there is little point saving 0.3% p.a. in charges when, for example, there are only 5 funds available which are all passive managed.

AVCs are no good if you are planning phased retirement or early retirement.

pawsforthought_2

I am currently paying into an AVC scheme through my employer . I believe that post A day I can ask to transfer the AVC element to another provider or a SIPP.My avc is with Norwich Union and pension is final salary (Would need trustees permission) This would then allow flexibility re phased retirement etc . Am I correct in my assumptions or is there anything else I should be aware of or consider ?

Thanks

Pawsforthought

dunstonh

After 6th April, in house AVCs will be able to provide 25% tax free lump sum but the scheme rules will need to be altered to allow this.

I have had a quick scan of a few of the A day booklets we get sent and can find no reference to the restriction on the AVC to occ scheme link being removed. It doesn't mean it wont be but I cannot find any reference to it. If this remains unchanged, it means you cannot transfer an AVC to a SIPP unless you are no longer a member of the occupational pension scheme.

A number of the rules and requirements are still not in place yet.

Pal

dunstonh wrote:

After 6th April, in house AVCs will be able to provide 25% tax free lump sum but the scheme rules will need to be altered to allow this.

This isn't quite correct. Some in house AVCs might be changed to 25% tax free cash sum, but that would have to be a deliberate decision by the Company or Trustees to modify the rules, as it isn't allowed at the moment.

From April, the Revenue will allow 100% of AVCs to be taken as tax free cash, as long as the total tax free cash from the scheme is worth less than 25% of the total benefits payable. (i.e. 25% of the value of the main plan benefits plus the avcs). I know quite a few schemes that are being amended to allow this, but some may not because the more cash people take from AVCs, the less they take from the main pension benefits, increasing the schemes long-term liabilities.

Many schemes current rules allow people to take their avcs in any form they want as long as it is allowed by the revenue rules, which up to now has meant 100% cash for pr-87 payers and pension only for post 87 payers. As a result most people should be able to take 100% cash from Avcs post A-Day unless action is taken to change the rules.

Most schemes I am dealing with are allowing 100% AVCs as cash post A-day. The question is whether that is better than a personal pension. A PP will allow you to take 25% cash, while AVCs increase your total fund value in the occupational scheme and allow you to take your 25% of the total entirely from the AVCs. In practice this will tend to mean you can take 25% avcs as cash, but if the tax free cash sum calc from the main scheme benefits is low, or the AVC fund is high compared to the value of the main scheme benefits, you might be able to take more cash from the AVC fund than you would from a personal pension.

Unfortutunately it is a complicated area that requires some detailed financial modelling and a heck of a lot of assumptions.

In theory by far the biggest advantage of in-house AVCs is that you have a group of Trustees monitoring the performance (using professional advice), who can switch to a new provider if the old one proves to be rubbish. In practice though I am not sure it happens as much as it should.

For that reason I would suggest that someone financially savvy (or taking professional advice) should go down the personal pension route. Others might want to go the AVC route, as at least it gives them someone to blame (the Trustees) if the performance turns out to be rubbish and they have failed to monitor the provider properly.

dunstonh

Sorry Pal, I must be missing something but I cannot read any difference between my paragraph and yours.

After 6th April, in house AVCs will be able to provide 25% tax free lump sum but the scheme rules will need to be altered to allow this.

Some in house AVCs might be changed to 25% tax free cash sum, but that would have to be a deliberate decision by the Company or Trustees to modify the rules, as it isn't allowed at the moment.

To me they say the same thing. It is possible but the rules of the scheme would need to be altered to allow it.

Have you got anything to add on the occ scheme-In house AVC link? I still havent seen anything saying it's being removed.

Pal

I'll try to clarify:

I read your paragraph as saying that UP TO 25% of avcs can be taken as cash if the scheme rules are amended to allow it.

In fact 100% of AVCs can be taken as cash if the rules are amended to allow it, subject to the total cash from the entire occ pension scheme not exceeding 25% of the total.

In fact scheme rules have to be amended to allow either of these scenarios, and many schemes will go for the latter rather than the former, just to allow more flexibility if it is ever required.

In practice, the difference in total cash in most cases may be marginal, but in some schemes may be very large. Also the cash conversion factors of most occ schemes are fairly poor value for the member, so being able to pay AVCs to get the tax free cash, and then taking the entire pension without reduction for cash might be to the member's advantage.

Off the top of my head I can't remember whether the link is being removed or not, but I believe that it probably is (I think the new revenue rules are silent on the subject, suggesting it would be allowed). Whether schemes would be amended to allow it is a different matter - most final salary schemes will not be amended for a number of years at best. Member demand for the feature might lead to a rule change though.