Pros and Cons of AVC Payments?

sea_quest

I'm exploring options to boost my pension and would like to learn more about AVC's.



FICTION? This could be wrong but, as I recall many years ago when I looked into paying into an AVC scheme there was some catch with the tax if I retired early. Something to do with only being able to take a pension up to a certain value relative to my salary, any extra AVC payments to top this up would be lost as tax.

FACTS – my details. I’m one of the lucky ones in a closed, non-contributory defined benefit scheme. I’m 43 looking to retire early (somewhere between 55 and 58) and for arguments sake have a £50K salary.
In considering only my retirement finances; is there any reason why I should to avoid AVCs in preference to a different long term or pension investment?

Andy_L

If your DB scheme allows it the AVC can be used to provide the 25% lump sum rather than having to commute (final salary) pension for lump sum, which can be an advantage if the main pension scheme has a punnishing commutation rate.

Other than that there a few advantages of an AVC over a private pension:
Your employer may have negotiated a discount on the charges that is better than you can get elsewhere
Paying by salary check-off rather than direct debit means sorting out tax is easier

Disadvantages:
Possibly less choice than a private pension
You may be obliged to take the AVCs at the same time as the main pension rather than when you like

dunstonh

FICTION? This could be wrong but, as I recall many years ago when I looked into paying into an AVC scheme there was some catch with the tax if I retired early. Something to do with only being able to take a pension up to a certain value relative to my salary, any extra AVC payments to top this up would be lost as tax.

There used to be a maximum income you could receive but that has been gone for many years (if you exceeded it you were hit with a penalty tax although you wouldnt lose the lot).

AVCs are largely obsolete nowadays. They can still be (highly) beneficial if the employer matches contributions (some AVCs have this but rare) or the AVC can be used in conjunction with the main scheme to have the full tax free cash payment from it (a minority of cases where this applies but worth checking).

kidmugsy

Does your scheme allow you to retire early? Would an early retirement in any way reduce the benefit of having an AVC? Does your scheme allow purchase of "added years" of service?

sea_quest

Thanks for the information and clarification. It helps identify where to look next.

My pension scheme allows early retirement as a non-contributory scheme only allows payment into AVCs via a separate scheme without the option to buy extra years. The scheme is based on 1/40ths , I have 21 years in it already and expect to add another 12 to 15.