Additional Voluntary Contributions

ketherin

I'm in a Final Salary Pension scheme and to qualify for my max 2/3rds pension I need to work approx 34 years, which I hope to do.

My question is I have been paying £100 per month (40% tax saving) into AVC's for the last 10 years and I'm thinking should I continue, as I'll already have my max 2/3rd's pensions.

What happens to my AVC fund when I retire?
Can I take it out as cash and pay (what rate) tax on it?
Do I have to buy an annuity with it?
Or as I'm going to get my 2/3rd is it wasted?

Hope this makes some sense.....and any help greatly appreciated. Thanks

dunstonh

AVCs are coming to the end of their life. Free standing AVCs are virtually dead for new business. In house AVCs attached can benefit from lower charges but the stakeholder pension has closed that gap big time and in some cases can be cheaper than an AVC. The flexibility of the stakeholder is usually a big gain.


When you retire, providing you are able to take the benefits from the occ scheme, the AVC will pay you 25% tax free lump sum (new from April 2006) and the rest is used to purchase an annuity. You can do this with the scheme administrators or use the open market option. The income is taxable.

The overfunding issues of the past will be watered down and virtually removed from April 2006 with a greater focus on contribution levels being the are of limitation.

You may wish to review your AVC contributions as buying extra years is usually better value in the long run (although more costly in the short term). Alternatively, a stakeholder pension would allow you to phase your retirement income over a period, which is not currently possible with an AVC. If you feel your retirement income is of a satisfactory level, then you may wish to switch to building up capital rather than feeding products which have to purchase an annuity. Utilising ISAs would be the first port of call there.

Pal

As Dunstonh points out, from April 2006 the Inland Revenue 2/3rds limit will fall away, meaning that overfunding should not be a problem for the vast majority of people.

One idea is to keep saving AVCs and then retire earlier than you would normally have done at the point when your pension, including your AVCs, reaches 2/3rds.

dunstonh wrote:

Alternatively, a stakeholder pension would allow you to phase your retirement income over a period, which is not currently possible with an AVC. If you feel your retirement income is of a satisfactory level, then you may wish to switch to building up capital rather than feeding products which have to purchase an annuity. Utilising ISAs would be the first port of call there.

A few "clarifications" on the above:

The Inland Revenue allows people flexibility over when they take their AVC benefits, so assuming that the final salary scheme rules have been amended to include this flexibility, it might be possible to take your AVC benefits at a different time to your main benefits, or even to use income drawdown. In practice many schemes don't offer this flexibility for administration and compliance reasons, but it might be worth asking your HR department.

Secondly, as you don't give your age, it is possible that you are still a fairly long way from retirement, in which case "overfunding" your pension is probably a good idea. It is possible that your final salary scheme may no longer exist by the time you come to retire (you won't lose the pension but your 2/3rds income target may have gone out the window). Given how expensive final salary schemes are to run, I would suggest maximising your AVCs contributions now while you can afford it in case your employer shuts the scheme down in the future. You can then stop paying AVCs when you are getting close to retirement and you have more of an idea of what it is going to be. (I am doing this myself).

dunstonh wrote:

You may wish to review your AVC contributions as buying extra years is usually better value in the long run (although more costly in the short term).

Very few schemes (esp. in the private sector) still give the option to use AVCs to buy added years of Pensionable Service. If your scheme does it, then you should seriously consider that option.

ernie

I also have AVC payments which I am maximising for the tax benefits etc . When the new pension regime commences in April 06 will I be able to transfer my AVC pot to a SIPP whilst leaving my final salary scheme in place .If so I assume I could take the 25% lump sum and not be forced to buy an annuity with the remainder .
Any clarification on this would be much appreciated

dunstonh

We don't know the specifics yet as to how you will transfer or if you can transfer.

At the moment, if you have an AVC, you cannot transfer it to another pension regime (such as SIPP, stakeholder or personal) if you are still in the occupational scheme that the AVC is attached to. I havent seen anything to say different to that from 2006. The AVC will be able to take a tax free lump sum of 25% without transferring it though. So, even if you cant put it in a SIPP, you can still get the lump sum entitlement.

Pal

Personally I think that the transfer regulations will be greatly simplified after 2006 (although it may not happen for a few years afterwards) to allow people to transfer AVCs out to other arrangements if they want.

That said as far as I am aware, the requirement to buy an annuity at age 75 is still going to apply to all types of pensions, even SIPPS.