AVC - Deal or No Deal ?

bristol_pilot

Following 'A-day' my Company has revised the options available for buying AVCs. It looks like a good deal to me, but there has been some negative comment on AVCs on these boards so I would welcome people's opinions.

I am age 42, in a final salary scheme with a retirement age of 63. Gross salary £50k, I also have taxable investment income of £10k. Latest projection from my Company scheme is that my pension will be £20,410pa plus a lump sum of £61,230. I also have a deferred pension from a previous job that will pay out £6,240 at age 62 (no lump sum). I consider £26,650 to be a reasonable pension.

The new AVC scheme is counted as part of the main Company scheme. It may then be possible to receive 100% of my AVC contributions back tax-free on retirement provided that the total lump sum is less than 25% of the total value of the cash+pension. For example, with no AVCs the lump sum proportion is 61230 / (20x20410+61230)=13% and if I pay in £74,837 of AVCs over several years the proportion is (61230+74837) / (20x20410+61230+74837)=25%. I am attracted by the idea of paying less tax now and having a larger lump sum on retirement, 40% of which comes thanks to the taxman.

Some of my workmates who are only 1-2 years away from retirement are pouring almost their entire salary into the cash fund using this scheme. I would probably go for one or more of the equity funds. There are several managed and tracker funds available, all through Prudential. Management fees are up to 0.65% and there is no initial fee.

An alternative to the above would be to put my £74,837 or whatever into a SIPP. But it is then my understanding that I could only take 25% as tax-free cash with the remainder having to be used to buy a pension at whatever poor rate may be available at the time. Is this correct?

Can anyone see any potential snags with the new AVC scheme? Have I missed anything?

Apologies for the long post. Any comments welcome.