AVC or Stakeholder

dunstonh

Added years would be the more expensive option. Maybe the amounts involved didnt make added years look that attractive and as has been said, it would probably have been based on your situation at the time.

Its possible that it was shrugged off with an assumption before it was investigated or was fully investigated and ruled out due to cost and benefit.

Did you discuss anything about retiring earlier? That has been a tightening up (from what i have been told) on teachers taking early retirement. If you retired early, the teachers scheme may stop you taking the occupational scheme early but you could take the stakeholder.

andyyorks

Thanks DD for your advice, particularly regarding the tax implications of FSAVC's.

Sorry about the whinge about Financial Advisors, seen two, both difficult to contact and get back with advice. One has gone fee based like you mentioned.

Cheers again, Andy

dunstonh

Thanks DD for your advice, particularly regarding the tax implications of FSAVC's.

Sorry about the whinge about Financial Advisors, seen two, both difficult to contact and get back with advice.  One has gone fee based like you mentioned.

Cheers again, Andy

NP. I'm a bit over sensitive about people who complain about advisors and think we are all like that.

Going fee based is what the Govt wants all financial advisors to do. Personally I think that would leave a great chunk of the population to not get advice and muddle along themselves.

You should also look at the posts on the thread about buying extra years as an alternative to AVC.

Pal

Added years would be the more expensive option.  Maybe the amounts involved didnt make added years look that attractive and as has been said, it would probably have been based on your situation at the time.

I think I understand what you mean but just to clarify, the added years option would only have been more expensive on the illustration if the assumptions used to calculate the number of years being bought were lower (when combined) than investment assumption and annuity rates being assumed for the stakeholder.

In practice buying the same annual pension through an occupational scheme should be cheaper, because:

- the mortality factors (which are trending upwards) are usually fixed at the date you start contributing, removing the negative effect on annuity rates of future improvements in mortality.
- there is usually no expense allowance made, whereas a stakeholder would have an expense allowance of anything up to 1% p.a., further reducing the final pension payable.
- final salary scheme "annuity rates" are usually better than those offered by insurance companies because they often do not include expense allowances or a profit margin.

The main advantage though is that it entirely removes the investment risk inherent in stakeholders by providing a pension based on final salary. It replaces the investment risk with a "salary related" risk, usually an assumption that salary will increase at a certain rate up to retirement (e.g. 5% a year on average). If the salary does not increase at that rate, the AVC payer could potentially "lose out". If it exceeds that rate, the AVC payer gains from the final salary nature of the added years promise.

It is likely that it is this last assumption that swung the balance in favour of the stakeholder in this case, but it highlights the importance of each person considering their own circumstances carefully before making a decision.

Pal

I'm a bit over sensitive about people who complain about advisors and think we are all like that.

I think that this is the problem of one-sided reporting.

Those who gain from their financial advisers (and blind luck suggests that there must be some people in this position ) keep quiet and forget about their finances. However when it goes wrong they shout from the rooftops that all IFAs are rip-off merchants.

Unfortunately, people expect IFAs to be able to predict the future for them. If they could do that, they would all have won the lottery many times over and would not be wasting their time advising other people on their finances! ;D

I agree with the comment about fee based advice. In the end hardly anyone will bother getting advice. The problem with commission is linked to what I said above. If people gain from their adviser's advice, they don't care about the commission. If they lose out because their advise failed to predict the future, they start screaming from the rooftops about how unfair commission is.

dunstonh

Giving it closer consideration I think I would agree with you Pal regarding buying extra years.

With lower projections being used on illustrations (to reflect the likelihood of lower future returns) and with lower annuity rates coupled with the lower inflation economy, buying of extra years may no longer be the more expensive option when looking at retirement income.

The old view of buying of extra years being expensive may no longer be the case. However, its been a long time since I did any reseach in that area. I need someone to come along now in that situation so i can sit down for a day and some research on it. HOWEVER, if someone was to come along like that, I would almost certainly only offer advice on fee basis otherwise there would be no income at the end of it. This could reflect the difficulty in getting quality commission based advice in that area. FSAVC/AVC business can increase your PI premiums as its considered higher risk than normal pension business and if you are going to spend many hours on it and increase your PI costs, you would want to earn from it.

DiggingOut

NP.  I'm a bit over sensitive about people who complain about advisors and think we are all like that.  
 

I don't know why you say we are all like that. I'm not the least bit sensitive about people who complain about advisors... ;D

andyyorks

I'm feeling guilty now DD and will never group all Financial Advisors together again.

I agree with you that the fees involved will stop people asking for advise as they may outweigh the gains from the investment, for small investors like me anyway.

Thanks for the advice.

oceanblue_3

DD wrote "Also, as its final salary pension you are in, you will not be able to contribute to a stakeholder pension due to your salary being over 30k."

This is not strictly correct; since April 2001, new rules have applied. These say that if your P60 earnings are below £30,000.00, at any time from April 2001 to April 2006, then you are eligible to contribute to a Stakeholder contract. A teacher currently earning £35,000.00 is highly likely to have had P60 earnings in April 2001 of less than £30,000.00 - don't forget, P60 earnings exclude superannuation contributions, for example. Effectively, you select 2001 - 2002 as your "base" year, and continue to make contributions for five years from now.

dunstonh

DD wrote "Also, as its  final salary pension you are in, you will not be able to contribute to a stakeholder pension due to your salary being over 30k."

This is not strictly correct; since April 2001, new rules have applied. These say that if your P60 earnings are below £30,000.00, at any time from April 2001 to April 2006, then you are eligible to contribute to a Stakeholder contract.  A teacher currently earning £35,000.00 is highly likely to have had P60 earnings in April 2001 of less than £30,000.00 - don't forget, P60 earnings exclude superannuation contributions, for example. Effectively, you select 2001 - 2002 as your "base" year, and continue to make contributions for five years from now.  

Although what you say on the base year is spot on, do teachers really get pay increases each year of that amount? You would need double inflation annual pay rises.