Pension AVCs - a good idea?

stec00

I'm considering upping my pension contributions (AVCs) significantly, possibly to 20% of salary or beyond. The main reasons are I've now paid off my mortgage and without them would be going over the 40% tax limit this financial year so it seems a sensible thing to do but I'm posting this before I take the decision in case anyone can advise on alternatives or if I'm making any false assumptions.

As far as I can see it would have the following advantages and disadvantages:

Advantages

---

- My workplace allows me to make the increased contributions in the form of a "salary sacrifice", which I think means they don't pay NI so I'll get slightly more in total.
- After pensions A day I'll be able to contribute as much as I like so could choose to carry on doing this every year to keep myself just under the 40% tax threshold. Would have to keep upping the percentage as my salary goes up though.
- Can avoid entering 40% tax bracket because of salary sacrifice so I hopefully won't have to fill in any self assessment forms.
- I use my ISA limit every year, although don't think this is relevant as even though an ISA is tax free it still comes out of money earnt after tax, whereas pension contributions come out of gross salary.

Disadvantages

---

- Money locked in until I'm 60 and then can only take up to 25% as a lump sum.
- Less choice with where the money is invested, can choose the funds but they may underperform. Can't choose to switch around if the Pension company (my work scheme is Friends Provident) does badly.

So weighing these up I'm thinking it would be worth it to avoid the huge 40% tax. Do many people do make such large contributions? I suppose not many people are fortunate enough to have paid off mortgage & not need the money immediately but for those who are is this what you've done?

Cheers for any advice...

dunstonh

AVCs are going obsolete as a new product from 6th April. Many schemes are closing their AVCs for new funds and only accepting contributions from those already running. You may find that it is too late to increase your AVC contributions if the pension administrator is a bit slow on admin.

Can't choose to switch around if the Pension company (my work scheme is Friends Provident) does badly.

Friends Provident are a good pension provider and have some excellent funds on the retail product. Particulary on the low risk side. If your pension trustees havent got the full fund range and you are not satisfied with that, you could raise it with the pension trustees who may be able to negotiate more funds being made available.

Do many people do make such large contributions?

The sort of level you are talking about it not at all uncommon.

chesky369

If Friends Provident have such good pension products, why do you think our company IFA wound up our arrangement with them in 2002, choosing instead to buy one of their investment bonds instead? (not a S32 bond either). Isn't an investment bond taxable in the way a pension product isn't?

dunstonh

If Friends Provident have such good pension products, why do you think our company IFA wound up our arrangement with them in 2002, choosing instead to buy one of their investment bonds instead?

Because he knows your financial circumstances better than I do so I cannot answer. Although you cannot switch a pension fund into an investment bond so there has to be more to it than what you are saying.

It would also depend on what FP pension you had. The 2002 PPP/SHP product was a little better than the current contract but yours may have been much older and on a legacy product offering limited terms.

Investment bonds are suitable investment tax wrappers for lump sum investments for higher rate taxpayers who will be basic rate (or lower) in the coming 20 years. Or they can be beneficial for those that use their CGT allowance in other areas as there is no personal liability for CGT on an investment bond as that is already paid within the fund. The rest of the taxation is almost the same as unit trusts.

chesky369

dunstonh - thanks - you say they can't do it but they did; mind you they didn't switch, they wound the scheme up and with the money bought an investment bond. the scheme was originally through London and Manchester, which was taken over by FP, so perhaps this scheme wasn't so good.

dunstonh

My immediate comment would be that its a buy out bond rather than an investment bond but you say it isnt.

L&M were (are for legacy business) not even close to FP in quality. This is often the case with a number of insurers. Current products can be vastly superior to old, previous company labelled products. That being said, there are also times that it can be very much the reverse where the old product contains guarantees that are highly desirable.

Debt_Free_Chick

stec00 wrote:

Disadvantages

---

- Money locked in until I'm 60 and then can only take up to 25% as a lump sum.
- Less choice with where the money is invested, can choose the funds but they may underperform. Can't choose to switch around if the Pension company (my work scheme is Friends Provident) does badly.

Just to address these points....

If you decide that increasing your pension saving is the right thing to do, then AVCs are not your only choice after April 6.

There will be nothing to prevent you putting your extra savings into a stakeholder, personal pension or SIPP. That would deal with the limited fund choice/limited switching choice.

In addition, by having a separate plan, you can take the proceeds at any age after 55 (after 2010).

So ... the changes being introduced in April actually make these disadvantages disappear.

Not suggesting that you should simply go ahead and plough extra into a pension - just saying that these particular disadvantages will cease to exist.

stec00

Thanks v. much for your replies everyone

dunstonh - when I said AVCs I thought this was a general term for putting more into your pension. If AVCs are disappearing I guess it must be only the name that's disappearing as I'll still be able to put more into my pension than the 2% that I'm required to put in in order for my employer to match it.

Debt_Free_Chick - Thanks for your helpful suggestions. I don't think I could open a stakeholder as I'm earning above 30k a year (unless this rule has changed since I last looked?) As for an alternative pension that I arrange myself would I be able to reclaim tax at 40% if I'm in that bracket? Even if that is allowed I think it may be less hassle to just put more into my work scheme as then there's no reclaiming to work out. Ideally I'd like to avoid ever having to fill in any forms by carrying on upping the salary sacrifice every year so I fall just under the 40% bracket.

Think I'll go ahead with this. I'm still thinking the only disadvantage is I'll be locking the money away, which may be a problem if I decide to move house or need it for some other reason. But reckon it'll be worth it for the extra whopping 40% the government "puts in" (or looking at it another way "doesn't take away"). Any further comments welcome... Cheers, Steve

dunstonh

dunstonh - when I said AVCs I thought this was a general term for putting more into your pension. If AVCs are disappearing I guess it must be only the name that's disappearing as I'll still be able to put more into my pension than the 2% that I'm required to put in in order for my employer to match it.

FSAVCs are going obsolete. AVCs are no longer compulsary to be offered and many schemes are removing them or offering alternative options after 6th April. Those that already have an AVC or FSAVC can keep them running.

Stakeholder/Personal pensions and SIPPs will take over from these on the whole. With these all being very similar, it may just appear like a name change.

Getting rid of FSAVC and removing the need to offer an AVC is very sensible and long overdue.

Debt_Free_Chick

stec00 wrote:

Debt_Free_Chick - Thanks for your helpful suggestions. I don't think I could open a stakeholder as I'm earning above 30k a year (unless this rule has changed since I last looked?)

It changes on 6 April 2006. Anyone can now have as many different pension plans as they like, but your personal contributions are limited to your salary.

As for an alternative pension that I arrange myself would I be able to reclaim tax at 40% if I'm in that bracket?

Yes - on your tax return

Even if that is allowed I think it may be less hassle to just put more into my work scheme as then there's no reclaiming to work out. Ideally I'd like to avoid ever having to fill in any forms by carrying on upping the salary sacrifice every year so I fall just under the 40% bracket.

Fair enough, but do consider the freedom and flexibility you would get with a separate plan - as well as the advantages of going with your existing company scheme.

matto

Why are FSAVCs going to become obsolete?

As far as I can tell the only difference between AVCs and stakeholder pensions post April 6 is that stakeholder pensions are limited to a 1% management charge which restricts the choice of funds available. If I want a top managed fund which charges over 1% I have to go down the AVC route.