company avc s are they worth it?

heathtown

i need some advice on whether to open a avc in my lgps.is it worthwhile doing,and what are the tax advantages?

dunstonh

If its the best option available to you then you should do it. If its not the best option then you should use the one that is. The problem is that the best option is not the same for everyone.

In-house AVCs are largely obsolete with modern personal pensions, stakeholder pensions and S&S ISAs often being better value for money and more flexible. Some in house AVCs can be used in conjunction with the main scheme for the provision of the lump sum. Most cant. The ones that can have an advantage, then ones that cant do not.

Any option where you put money aside is better than doing nothing. However, which is best will depend on more info than you can provide on a website.

Loughton_Monkey

I think you have to look at the wider picture first.

This means deciding whether or not it's a good idea to make further investment into a pensions scheme (of any 'flavour') over and above your employer scheme.

It is usually very effective to pay additional pension contributions. You will receive tax relief (at whatever rate you pay) on the additional contributions. If you pay basic rate tax, then this means 20% tax. If you then take the pension fully as monthly/annual pension, then all the tax relief is eventually clawed back by 20% tax on the annuity in retirement. In this (rare) case, you might just as well have invested in a Stocks & Shares ISA, since you can buy (substantially) exactly the same investments and the resulting fund is far more flexible.

Where a pension 'scores' over an ISA, is the ability to take 25% as a tax free lump sums. This means that some of the tax relief (25% of it, logically) remains 'in your pocket' in return for the more limited flexibility in taking pensions (compared to ISA's).

You may wish to 'bone up' on the new laws from April that allow 'Flexible Drawdown'. If your LGPS (and State Pension together) comes in at above £20K, then any seperate and individual pensions can be drawn far more flexibly under the new rules - making them arguably a better option than ISA's.

Sometimes [and forgive my lack of LGPS pensions] there are specific other 'goodies' with the built-in AVC - but you need to await more informed opionion about this. But what I am getting at is that if the AVC is simply 'extra money purchase pension' then you should look at the fund choice and charging rates since better might be available elsewhere (and an IFA can advise - but not on these boards).

If you are in a position where you can contribute to a pension scheme at higher rate tax, and withdraw from it at basic rate (some of it under the flexible drawdown arrangements) then pension contributions become a significantly better proposition than Stocks & Shares ISA's.

bristol_pilot

dunstonh wrote: »

Some in house AVCs can be used in conjunction with the main scheme for the provision of the lump sum.

OP - it is crucial to find out whether your AVC scheme is of this type. If it is, there is the possibility of taking up to the whole AVC pot as a tax-free lump sum on retirement. This is a huge benefit, especially for a higher-rate taxpayer. Ask your scheme admin people.

heathtown

thank you for your replies,the scheme i am in is a lgps, the avc scheme is run in house by the pru,i was just wondering if i put in the max allowed saved for 4 yrs max, i am 61 i can have the lot as a tax free lump sum,surely that is the best risk free investment i can make?

dunstonh

heathtown wrote: »

thank you for your replies,the scheme i am in is a lgps, the avc scheme is run in house by the pru,i was just wondering if i put in the max allowed saved for 4 yrs max, i am 61 i can have the lot as a tax free lump sum,surely that is the best risk free investment i can make?

No, you cannot take the AVC itself as 100% lump sum. The maximum is 25%.

However, as has been mentioned a few times on this thread, you need to find out if the AVC can be used in conjunction with the main scheme to have the Tax free cash from the main scheme paid out of the AVC. That is the really only major benefit of an AVC left (compared to alternatives) but is only an option on a minority of schemes. It is a damned valuable option if it is though. It can swing the decision from personal pension or S&S ISA back to AVC with nothing else getting close. If that option isnt available then it swings away from AVC to personal pension or S&S ISA.

traineepensioner

Hi Heathtown,

Welcome to the forum.

I believe that the LGPS allow the AVCs to be added to the main pension scheme (please confirm this with your scheme administrator). This makes AVCs a very worthwhile option as the entire AVCs can be taken as a tax free lump sum on retirement, as long as this is under the 25% of TOTAL pension fund value. If the LPGS allow a choice of funds or cash deposit to invest your AVC, I would suggest that cash deposit would be a better option in view of your age (assuming you intend to retire soon).

I intend to retire in 18 months and I'm currently investing my salary (pre-tax) into a cash deposit AVC. I'm living off my savings, which aren't gaining much in the way of interest anyway, and looking to get back my invested salary tax free in 18 months time.

HTH

heathtown

hi, once again thank you all for replying to my questions,in our scheme you can have the avc as the lump sum part of your pension,so i am i correct in assuming this is a good deal.
thanks all

heathtown

me again,if i do go down the avc route,what is the max contributions allowed per year,
thanks again