Size of tax free lump sum from NHS AVC

littleweed

First post on these forums, I thought I'd try and tap into the many experts who post here on the subject of pensions.
My wife has been paying into an NHS AVC for many years to help make up for part time working. She can retire aged 55 in a couple of years with unreduced pension. Since A day it has been possible to take 25% of the AVC 'pot' as a cash free lump sum. However I am aware that some schemes (those that allow the AVC to buy added benefits in the main scheme eg local government) allow cash to be taken from the main AVC up to 25% of the total pension value. This is obviously very advantageous but not allowed in the NHS scheme.

I have come across several references which suggest that all AVCs must be brought under the same tax free lump sum regime by 2011. For example
(Sorry not allowed to post link as a new user! so copied below)

This guy appears to got his AVC as cash while not being in a scheme in which the AVC can be used for buying added years but its a bit unclear. I have tried to find the primary legislation without success.

My question is as follows. Am I barking up the wrong tree with this 2011 date?. Talking to the NHS scheme administrators is not an option at the moment- they have been struggling for months with a trifling issue.

Thanks for any help offered


AVC or FSAVC queries
Hi, I am in the process of drawing most of my pension arrangements at the age of 55. Lots of useful stuff from here has helped and my personnel pension is now sorted.

I am at present waiting to here if my application for early retirement on ill health grounds with my company pension has been successful. I am actually on the pensions consultative comittee and am in regular contact with one of the trustees and as such am advised that there is unlikely to be a problem.

I am advised though by the secretary to the trustees that I will have to take my AVC pot at the same time. Pity, as I wanted to leave that untill later, but its not a massive amount and they are still trying to clarify this issue for me.
Just to explain, the company scheme is final salary with AVC being run sort of as money purchase alongside the company scheme by Norwich Union, FSAVC's?? The company calls it group avc contributions.

The company scheme rules seem well documented but I am having great difficulties in finding out how the AVC pot will be used, it certainly can't be used to by extra years.

My AVC pot is about £33k

I picked up on this today, it's quoted from the telegraph about June 06, after A day or whatever. Can someone comment on this and give me an idea how most companies interpret what is being said? The idea of cash being removed from AVC's rather than the FS scheme seems very sensible


"Free-standing AVCs (FSAVCs) are like in-house AVCs but held independently through an external pension company.
Previously they had also been barred from paying out tax-free cash. But since the new pensions tax regime took effect two months ago, not only can you take 25 per cent of your AVC fund as a tax-free cash lump sum but you can also take cash out of your AVC fund up to a quarter of the value of your final-salary benefits, if you have any.
The reason this is such good news is that most people want to take tax-free cash. However, lump sums from final-salary schemes are often a poor deal. Some company schemes offer as little as £10,000 for every £1,000 a year of income given up, yet the cost of buying that annual income through an annuity could be as much as £20,000.
Under the new rules, however, people with AVCs can take 25 per cent of the full value of their final-salary scheme out of their AVC pot, meaning they get fair value for their tax-free cash, provided the scheme's trustees allow it.
Some schemes may not have changed their rules to allow you to do this, but they will have to do so by 2011, so ask your trustees where you stand.
For example, someone offered a £50,000 lump sum for trading in £5,000 of annual pension income would instead be able to draw more than £100,000 free of tax from a well-funded AVC pot.
Lee Smythe, an associate director of Killik & Co, the stockbroker, says: "People will be able to get more tax-free cash and preserve their retirement income by taking their money out of their AVCs rather than from their final-salary benefits.
"In fact, for somebody who hasn't yet paid into AVCs but who is on the verge of taking their tax-free cash, it would be worth paying in as much as possible now into an AVC just so you can get your cash out at fair value."
The new pension rules mean that saving alongside your occupational scheme is easier than ever, but for people who have defined-contribution pensions the benefits of staying with AVCs are less clear.
I know I will have to address this issue with my own company scheme, but not many people use the AVC facility and the company itself have little experience in the post A day in dealing with AVC payouts. I just keep being told it will be more attractive to acept what the company offers that to take the pot elsewhere which I'm sure I have every right to do so as I had this clause written into my file when I opened the AVC arrangement about 10 years ago"

I know I will have to take the issue up with my company, but not many people use the AVC facility and I don't think the company has a great deal of experience in the new rules. I think I will be the 1st to take AVC based funds since A day.

I can't even get a clear indication of how the pot will be used to provide a pension other than it cannot be used to buy extra years. They simply tell me that I will be better off with the offer I'm given than if I take the fund elsewhere, (as I'm sure I have right to as I had that listed as a condition on my file when I started the AVC pot about 10 years ago).

Any experiences in what other companies do?

Andy_L

The A-day rule changes allow schemes to pay out AVCs in this way, they don't oblige them to do it.
I suspect that the article is either wrong or saying that if a scheme allows AVCs to provide all off the tax free lump sum then they must (by 2011) allow FSAVCs to do so as well

dunstonh

The 2011 date probably refers to the fact that scheme rules had to be amended by the end of the 2010/11 tax year.

However, that doesnt mean they have to add the AVC to the main scheme. That is the point they have to comply with A day changes and that means 25% pension commencement lump sum on the AVC.

As Andy says, the rules allow schemes to combine multiple plans for the calculation and payment of the pension commencement lump sum, there is no requirement for it to be offered.

You would suspect that any plan that has changed its rules already (which I would say is most now) is not going to change them again.

With regards to that article. It makes reference to FSAVCs. They ceased to exist after 6th April 2006. They all became personal pensions. Although providers of existing plans do sometimes still refer to them as FSAVCs (similar to some that still call their MINI ISAs MINI even though that doesnt exist any more). However, technically they are personal pensions and are treated as such. So, the reliability of that article should be of doubt.

Seemore_2

Hi littleweed, just a general observation but if your wife's scheme allows an open market option I would strongly recommend it. I took early retirement at 53 this year from a government agency and had an AVC with Scottish Widows.

I was originaly happy to go with them but after numerous hassles obtaining quotes and being subjected to market value reductions due to the length of time between accepting retirement and my actual retirement date, I eventualy got fed up and went open market.

Although I didnt take a lump sum the company I eventualy went with (Just Retirement) offered a much improved deal.

Well worth going the extra mile.