Which is better for me, AVC or SIPP?

Simran

Hi

I am 46 years old and in a company pension scheme (money purchase) which has a current value of about £125,000 which equates to an annual pension projection of £14,000. The scheme works via salary sacrifice and the employer contribution is £13,125 per annum.

For this year only, due to one off bits of income, I will be a 50% taxpayer. From April onwards I will revert to 40%. I received a letter from Hargreaves Lansdowne stating that I would get 50% tax relief if I opened a SIPP before the end of this tax year. This seems to be a logical option given my age but is it worthwhile me opening a SIPP or contributing the same amount to my company pension scheme via an AVC?

dunstonh

Why have you eliminated increasing the existing pension scheme, utilising a stakeholder pension or personal pension? The SIPP and an AVC are not the only options. Could you not increase the contributions into the money purchase scheme to keep it one place and benefit from salary sacrifice? I cant see the point of an AVC with a money purchase scheme.

Simran

dunstonh, the amount currently going into the company pension scheme is the maximum allowed by the company's rules; the only alternative offered by them are AVCs.

To be honest, I am not very familiar with the differences between the various schemes available and AVC's and SIPPs eg you mentioned stakeholder, personal pensions, are there any key distinguishing differences?

dunstonh

are there any key distinguishing differences?

investment options and charges mainly. SIPPs are typically the most expensive option for funds (especially for inexperienced investors).

Shame about the company enforcing a maximum contribution to the money purchase scheme. You would have thought they would have abolished that rule years ago when the contribution limits changed.

Simran

would you say that in view of this, AVC's are the preferred option (I have also asked the pensions dept whether our scheme rules allow the AVC portion to be taken out as part of the 25% tax free lump sum after reading other similar posts here)?

dunstonh

would you say that in view of this, AVC's are the preferred option (I have also asked the pensions dept whether our scheme rules allow the AVC portion to be taken out as part of the 25% tax free lump sum after reading other similar posts here)?

With a money purchase scheme, the AVC tax free cash side is irrelevant as its effectively two money purchase schemes. It is actually unusual to see AVCs with a money purchase scheme as there isnt much point. Its creating unnecessary extra admin for the employer, scheme administrator and you. Someone at your firm needs to be brought up to date.

The AVC option is probably not dissimilar to a stakeholder (cant say without knowing details but most are). If you are a more experienced investor who wants wider investment choice and options then that would really be the only reason to look at the other options. The key thing to find out from the AVC is what investment funds are there and what are the charges.

It may also be worth finding out if the administrators are looking to change the scheme rules as they are out of date. percentage based rules were replaced with contribution based rules many years ago. Indeed, the revised limits coming in next month mean that using percentage based contributions could be dangerous from a tax point of view.

Loughton_Monkey

Simran wrote: »

I received a letter from Hargreaves Lansdowne stating that I would get 50% tax relief if I opened a SIPP before the end of this tax year.

These rules are HMRC rules and apply whatever pension contribution you do.

When you are paying above the 20% basic rate tax, pensions become an extremely tax efficient investment. And you should certainly seek to pay enough in to avoid 50% tax, and as much of the 40% as you think fit.

But since you will be talking about some serious money, you should maybe talk to a good IFA who can analyse the charges and fund choices under your main company scheme, your AVC, and/or any other arrangement that could be better.

Simran

Thanks Loughton Monkey

Can you suggest an IFA or where I can find one?

Loughton_Monkey

http://www.unbiased.co.uk/?gclid=CLeKksG0iqcCFcse4QoduSwXdg

zagfles

dunstonh wrote: »

Why have you eliminated increasing the existing pension scheme, utilising a stakeholder pension or personal pension? The SIPP and an AVC are not the only options. Could you not increase the contributions into the money purchase scheme to keep it one place and benefit from salary sacrifice? I cant see the point of an AVC with a money purchase scheme.

The point is that with AVC's you can make a one-off contribution whenever you want, with salary sacrifice you usually have to sign up for 12 months for the scheme to be "effective". So it wouldn't be any use for a one-off contribution before the end of the tax year.

See http://www.hmrc.gov.uk/manuals/eimanual/EIM42767.htm

In my company's scheme AVCs go into the same pot as the salary sacrifice contributions, I think this is usual.