AVC or SIPP

Zebra

I currently have a final-salary pension scheme from my employer, with contributions of about £200 a month.

I also make ARC's of about £500 for 6 years to give an additional pension of £3,250 a year.

I'm paying basic rate tax at the moment - though getting higher rate relief on the ARC's.

I've decided that I can afford another £500 a month towards my 'pension pot'.

I could pay this by way of AVC's in a limited number of funds from two providers - Scottish Widows or Prudential.

Or would I be better advised to take out a SIPP instead for a wider choice of funds?

Do I get the same benefits from a SIPP as AVC's - in particular the option of taking at least 25% as a tax-free lump sum?

Are there any other options available?

dunstonh

Do I get the same benefits from a SIPP as AVC's - in particular the option of taking at least 25% as a tax-free lump sum?

Possibly. It depends on scheme rules. Not all AVCs have moved to pay a 25% tax free cash yet. Some AVCs can be used in conjunction with the main scheme with regards to tax free cash calculation.

Are there any other options available?

personal pensions, stakeholder pensions and Stocks & Shares ISAs.

Zebra

dunstonh wrote: »

Possibly. It depends on scheme rules. Not all AVCs have moved to pay a 25% tax free cash yet. Some AVCs can be used in conjunction with the main scheme with regards to tax free cash calculation.

The AVC's associated with my employers scheme do - but would a SIPP?

dunstonh wrote: »

personal pensions, stakeholder pensions and Stocks & Shares ISAs.

What are the differences/benefits to personal pensions, stakeholder pensions and SIPPS.
I already have an S&S ISA maximised each year - this is in addition to that, ideally I'd like to spread my money over a wide choice of options for flexibility.

dunstonh

The AVC's associated with my employers scheme do - but would a SIPP?

Whilst technically, the rules allow it, you would be hard pushed to find an occupational scheme allow it.

What are the differences/benefits to personal pensions, stakeholder pensions and SIPPS.

SIPP is the experienced investor option. Typically the most expensive option for funds. Designed mainly for direct investments. Stakeholder was a means to reduce charges on pensions a decade ago. However, things have moved on over the years and you find many personal pensions are now cheaper than stakeholder whilst offering a larger fund range.

Zebra

dunstonh wrote: »

Whilst technically, the rules allow it, you would be hard pushed to find an occupational scheme allow it.

Thanks - as I say, my employer's scheme does so maybe I should stick with the AVC's then, as the 25% tax-free would be a welcome bonus.

dunstonh wrote: »

SIPP is the experienced investor option. Typically the most expensive option for funds. Designed mainly for direct investments. Stakeholder was a means to reduce charges on pensions a decade ago. However, things have moved on over the years and you find many personal pensions are now cheaper than stakeholder whilst offering a larger fund range.

What is the difference between personal pensions and SIPPS? And would personal pensions offer the 25% tax free instead?

dunstonh

Thanks - as I say, my employer's scheme does so maybe I should stick with the AVC's then, as the 25% tax-free would be a welcome bonus.

Just checking that we are talking about the same thing. All the individual plans allow the 25% tax free cash. Some occupational schemes allow you to take the FULL tax free cash totally from the AVC and not the main scheme. If that is an option, then it can be valuable. If its not an option then the AVC is likely to be largely obsolete compared to the other options.

What is the difference between personal pensions and SIPPS? And would personal pensions offer the 25% tax free instead?

There is no difference in HMRC rules on any of the different types of individual pensions. The difference is mainly product driven. i.e. Stakeholder has to be mono charged (AMC only) and has a cap on charges. Personal pension has flexible charging methods which can be more expensive or cheaper. However, providers offer more funds (ranging from just a handful to over 1000). SIPPs were designed to allow access to shares and other direct investments that are not typically available on most personal pension plans (although some do nowadays or will be soon).

Zebra

dunstonh wrote: »

Just checking that we are talking about the same thing. All the individual plans allow the 25% tax free cash. Some occupational schemes allow you to take the FULL tax free cash totally from the AVC and not the main scheme. If that is an option, then it can be valuable. If its not an option then the AVC is likely to be largely obsolete compared to the other options.

Sorry, I was confused - Yes, that is the case, I can take 25% of the total pension 'value' which could mean 100% of the AVC's, depending on relative individual values.
Would that be the same for any of the other individual pension plans?

dunstonh

Would that be the same for any of the other individual pension plans?

No. (noting point about rules allowing it but scheme unlikely to).

Zebra

dunstonh wrote: »

No. (noting point about rules allowing it but scheme unlikely to).

Thanks Dunstonh.

So the choice is between:
- an AVC with a limited fund choice but the option of up to 100% taken tax-free.
- or an individual pension plan with a wider range, and therefore possibly better performing fund, but only the standard 25% tax-free amount.

I guess it most cases the extra tax-free amount more than compensates for the possible poorer performance and any higher charges.

On a slight tangent, would there be anything stopping someone investing in AVC's, taking the maximum available tax-free amount on retirement, and then investing that in a personal pension for an extra 10 years, with the tax-relief on contributions giving a double tax-whammy?

Pixieboy

Reinvesting tax free cash as suggested may be treated as recycling, and unsurprisingly HMRC frown on double tax relief...
http://www.hmrc.gov.uk/MANUALS/rpsmmanual/rpsm04104925.htm

dunstonh

You can do it within limits though. The £3600 a year (x2 if you have spouse/partner) would not be considered recycling. Many retirement people go on to use the annual pension allowance in retirement as a tax efficient means of building capital for income provision later in retirement or improving death benefits or an attempt to rebalance lop sided retirement provision between couples.