Advice about AVC or ISA

lucylou103

Hi,
Just got my annual statement for pension, I am in my 30s and have only have 7 years in a teacher pension. Concerned it won't be enough I want to invest £200 extra each month for retirement. Is it better to put this into an AVC I can do this with prudential as part of my pension or into an ISA. I have tried to look at some of the previous threads but it sounded a bit complicated. Just want a deal where I won't lose any money

jem16

You really have to look at all the alternatives rather than just AVC or ISA.

First of all you have two routes to take through the Teacher's scheme.

1. Additional pension
2. AVC

The Additional pension is buying a set amount which will be paid with your main pension. There is no investment risk attached to this option just like your teacher's pension. You can go to the website and get a calculation for it. Whatever amount you buy is index linked until you actually get it at retirement.

AVC is subject to investment risk and will go up and down in value over the years. However AVC's are considered old fashioned now unless there is a link with the main scheme that allows the tax free lump sum to be taken from the AVC pot. This option isn't available with the teachers' scheme. So if you don't want to go down the route of Additional pension then you are probably better off investing outwith an AVC.

This leaves you with;

1. Stakeholder pension
2. Personal pension
3. S&S ISA - not cash ISA as it's not suitable over long term as it's subject to inflation risk. Generally a S&S ISA will perform better than a cash ISA over the long term but no guarantee.

Which is better for you out of all these options depends on your attitude to risk, your tax status currently and how much you want to pay.

MoneyDude

Hi LucyLou and Gem,

This is an interesting thread for me because I'm a civil servant aged 52 and I've been paying into a Scottish Widows AVC (administered by my employer) since 2001. For the first 5 or 6 years it was in a with-profits fund but I then transferred it into a unit linked fund. The problem is it doesn't seem to be doing very well.

I'm currently paying £165 a month into it and this increases as my pay increases. Based on my latest statement, dated April 2011, the transfer value is £29,000. The projection for what I'll get paid at age 60 (based on a projected growth of 7%) is £1840 pa which of course is taxable. That means I'll be getting only £153 a month before tax which is actually less than I'm paying in, despite the fact the stock markets have rallied over the last year.

On that basis I think your advice to LucyLou is spot on Gem, or am I missing something? I therefore seem to have 3 choices, a) carry on paying into it and hope that it starts to perform better, b) stop paying into it, put my £165 a month into something else, but leave the fund that I've built up so far where it is, or c) stop paying into it and transfer the £29,000 into something else (does that need to be another pension fund?).

Any advice Gem? LucyLou, based on my experience I think Gem has given you good advice in terms of steering clear of AVCs, bearing in mind that Scottish Widows is, I think, supposed to be one of the better ones.

jem16

MoneyDude wrote: »

a) carry on paying into it and hope that it starts to perform better,

Perhaps review the fund choices?

b) stop paying into it, put my £165 a month into something else, but leave the fund that I've built up so far where it is, or c) stop paying into it and transfer the £29,000 into something else (does that need to be another pension fund?).

It does need to be another pension fund. However one thing you need to remember is that it is not the taxwrapper ( i.e. pension ) that is not performing. It is the investements ( i.e. funds) isnide the wrapper that matter. Transferring to another provider and using the same fund/s will have exactly the same outcome.

MoneyDude

Thanks Gem. I think I'll do two things. First, stop further payments into the AVC on the basis of what you said to LucyLou and invest the £165 a month in some other way (S&S ISA perhaps). Second, look for a better fund for the money that I've already paid in, either with SW or with Standard Life (the other provider used in the Civil Service AVC scheme) or with a provider outside of the CS AVC scheme. The only problem with the last option is that I understand that that costs are lower in the CS schemes because of the economies of scale.

jem16

MoneyDude wrote: »

Thanks Gem. I think I'll do two things. First, stop further payments into the AVC on the basis of what you said to LucyLou and invest the £165 a month in some other way (S&S ISA perhaps).

Remember this may not be the best option for you - it's only a suggestion. Does the Civil Service AVC allow you to take the tax free lump sum from the AVC pot alone?

The only problem with the last option is that I understand that that costs are lower in the CS schemes because of the economies of scale.

An IFA would be able to do a comparison and see what is best.

MoneyDude

Hi Jem. No a lump sum option is not available. I think you're right, it is probably best to see an IFA. Thanks for giving me these pointers, its been really useful and is very much appreciated.