AVC advice please

seanatlilac

I have been reading these posts for sometime but still haven't come to grips with pensions, if anyone can put me straight that would be great.

I am in a final salary company pension scheme but would like to make additional payments on top of this. The scheme itself does not allow me to add any extra payments to increase the years earn't but does administer through my payroll an avc scheme through standard life.

I am 43 years old and am aiming to retire at 55. On top of my company pension I would like to save £7000 pa of my salary (gross) to assist at retirement. My question is which is best a) invest £7000 direct from my salary into the company AVC or b) invest the net worth of my £7000 salary, £4130 after tax as I am a 40% tax payer in a A N Other scheme. It would appear it would make sense to have £7000 in a scheme rather than £4130 in an ISA.

Any views would be welcome.

dunstonh

My question is which is best a) invest £7000 direct from my salary into the company AVC or b) invest the net worth of my £7000 salary, £4130 after tax as I am a 40% tax payer in a A N Other scheme. It would appear it would make sense to have £7000 in a scheme rather than £4130 in an ISA.

If the charges and fund range of the AVC are good, then that would be worth looking at. If its like many AVCs and has a rubbish fund selection and charges which are no longer considered cheap by modern standards, then a personal pension would be a better choice.

I am higher rate taxpayer but dont pay into a pension. Little point as 40% in and 40% out cancel each other out. Plus I would prefer to remain in control of my capital.

Another consideration is that the annuity rate at age 55 is going to be awful and any extra tax relief you have gained by being a higher rate taxpayer could be lost on getting a much lower annuity rate for the rest of your life.

Curious_Moose

Check if your company offers a salary sacrifice. Effectively, you agree to take a pay cut and the money goes direct into a money purchase arrangement. Some companies agree to rebate the National Insurance saving into your policy which makes it more attractive than AVCs.

Only downside is that it may affect your entitlement to some State benefits if you were made redundant.

I've done a salary sacrifice and for me it was definitely better than an AVC.

As you are a 40% tax payer, that makes the tax saving (AVC or salary sacrifice) even more appealing than for a basic rate payer when you compare it to an ISA. What is your tax rate liable to be when you retire? That's a factor too.

It may also be the case that you can use the AVCs to offset some of the tax free cash you would have taken from the final salary scheme. This is usually better than commuting any final salary pension for tax free cash as commutation factors do not usually reflect the true value of the pension being given up.

ISA has the advantage that it is more flexible and you can do what you want with the money. Some AVC or salary sacrifice will need to be used to buy a pension. Annuity rates are high and that means less pension for your money than you would have got a few years ago.

Check these points with your HR department who should be able to offer scheme specific information.

PS - Just noticed, there's a sticky on salary sacrifice!

seanatlilac

Thank you for your replies.

Because I will be retiring early (at 55) I will lose approx 28% of my final salary pension thus leaving me in the basic rate tax bracket.

Company AVC - according to the paper work attached to the application form the standard life group avc invests 100% of contribution and charges 0.6% management charge per year via their unit costs, the fund allows me to choose the risk level I wish to take.

The bit I cant undertstand is that in an ISA or any other investment the nett £4130 has to grow to £7000 (tax free amount) before it starts to perform better than an AVC!

Does any of the above information help in any advice that can be given?

Many thanks

Mortgage_&_debt_free

seanatlilac wrote:

Thank you for your replies.

Because I will be retiring early (at 55) I will lose approx 28% of my final salary pension thus leaving me in the basic rate tax bracket.

Company AVC - according to the paper work attached to the application form the standard life group avc invests 100% of contribution and charges 0.6% management charge per year via their unit costs, the fund allows me to choose the risk level I wish to take.

The bit I cant undertstand is that in an ISA or any other investment the nett £4130 has to grow to £7000 (tax free amount) before it starts to perform better than an AVC!

Does any of the above information help in any advice that can be given?

Many thanks

Check what options you have re the AVC. The local govt scheme allows you to take up to 100% of it as tax-free cash since A day.

If this is the case I would suggest this is as good as it gets - tax relief on the way in and tax relief on the way out i.e. free money + the growth.

I'm funding an AVC but also a S&S ISA for more flexibility re fund availability and access to capital later on.

There's nothing to say you can't do both to spread the risk/opportunity.

Good luck

dunstonh

The bit I cant undertstand is that in an ISA or any other investment the nett £4130 has to grow to £7000 (tax free amount) before it starts to perform better than an AVC!

At age 55 you are looking at an annuity rate of around 3% gross (with RPI and 50% spouse). With 22% tax thats 2.34% income of the amount you have put into the pension.

So, lets say the pension is worth £13,766 and ISA is worth £8260 to take account the difference in tax (treating the 40% as if it was in the pension).

£13,766 @ 2.34% = £322.12 p.a. net
£8260 @ 5% = £413.00 p.a. tax free

So, the ISA is the better choice.

Standard Life AVCs often have a restricted fund range leaving you with quite a poor fund choice. The 0.6% is largely irrelevent nowadays. Its cheap but its only around 0.4-1% p.a. less than current products and if the fund arent that good, the difference in peformance could easily wipe out the difference in charges.

martinpike

dunstonh wrote:

£13,766 @ 2.34% = £322.12 p.a. net
£8260 @ 5% = £413.00 p.a. tax free

So, the ISA is the better choice.

Surely comparing an annuity with RPI increases against the ISA option isn't like for like?

dunstonh

Surely comparing an annuity with RPI increases against the ISA option isn't like for like?

There are differences but a low risk investment into ISAs would be expected to average around 7% p.a. so if you take 5%, you still have 2% going into growth which can then be used to bring in future increases. If you really think pensions end up being the best thing, you can always move the ISA into the pension later. Something that you cannot do the other way round.

martinpike

dunstonh wrote:

There are differences but a low risk investment into ISAs would be expected to average around 7% p.a. so if you take 5%, you still have 2% going into growth which can then be used to bring in future increases.

Still a little apples and pears?

An annuity is guaranteed, an (S&S) ISA, even a low risk one, is not.

Please don't think I disagree with your conclusion, because I don't, I just think the risks with the ISA option haven't been made absolutely clear.

dunstonh

An annuity is guaranteed, an (S&S) ISA, even a low risk one, is not.

There are investments that guarantee 5% net income and can lock-in growth at various points and allow the 5% to be reset against fund value as it goes up.

You arent going to get a perfect match but the annuity paying 2.34% would increase to around 2.4% in year 2 and would take ages to get up to the 5% on the ISA. Maybe later in life, if your risk really is that low then you can move it across annually into an immediate vesting personal pension and maybe a purchase life annuity.

seanatlilac

Thank you for all your replies, still not sure quite what to do but your views certainly have given me something to consider.