AVC added years or money-purchase? - or SIPP?

david_c_6

I'm in a final-salary company pension scheme and am considering buying added years by means of a lump-sum payment. The scheme roughly mimics the civil service scheme as it was before the last set of changes (premium etc.), but it now requires an employee contribution (it's still fully index-linked though). I'm 48, and my past job moves mean that if I stay in the scheme til I'm 60, I'll only have 30 years' worth out of a maximum 40 years' worth, so my first inclination is to work towards closing the gap by buying added years. (I don't want to retire at 60, but I'd like to be financially secure by then.) I've used up my ISA allowance for this year, and I expect to have enough spare cash to use up next year's allowance, but the thread on pensions vs. ISAs made me think I ought to look more carefully at the alternatives (so thanks, people). Especially as my age and the current low gilt yields make buying added years a lot more expensive than they used to be. Also, I don't like having all my eggs in one basket. Also, I don't really envisage making it to 60 without being made redundant or the scheme being closed. What I'm after is some guidance on how to look at this in order to make a vaguely rational decision.

My situation
48 years old, £30k p.a., going up by slightly less than RPI for the last few years, and I don't see that changing any time soon, so I don't anticipate becoming a higher-rate taxpayer in the immediate future. Pension 1/80 final salary + 3/80 lump-sum per year of service, and contracted out of S2P. But I don't imagine being in a final salary scheme when I retire: either I'll have changed jobs or they'll have closed the scheme (it's probably not too unhealthy at the moment, though).

My alternatives
AVC added years The scheme allows me to spend up to £3635 gross (£2835 net), which will buy me 167 days of extra service, so a little less than half a year's worth. Index-linked, and I don't have to worry about how long I live in retirement, but maybe less worthwhile if I don't stay in the scheme til 60.

AVC money purchase in the company scheme. Less affected by leaving the scheme before 60 (or the company dropping the final-salary scheme). A reasonable choice of funds (legal & general, baillie gifford), which I could live with, but if I'm going the money purchase route why not go elsewhere? I suppose I need to check the charges.

Stakeholder. I'm sure I read that you could have a stakeholder pension in addition to an occupational pension if you earned less than a certain amount, but I can't find any current info on this at all. It would be a second basket for my eggs and not affected by leaving the company scheme.

SIPP. I'm not an expert at all, but I'm confident about choosing funds after having S&S ISAs for a few years (hindsight suggests that, if anything, I'm probably a bit too cautious). I'm not interested in gold bars or wacky investments, but I get the idea from other threads that SIPPs are generally cheaper than stakeholders.

Save the after-tax £2835 outside any tax wrapper (I've already used up my ISA allowance). Maybe to buy added years in the future when gilt yields might make it cheaper. Or to put into an ISA when I don't have the spare cash. Or to reduce some future mortgage (I worked out that reducing a 20-year mortgage by the £2835 net amount would save £273 per year at the current 7.25% svr or £232 per year at a typical 5.25% fixed rate, which is obviously beneficial over the life of the mortgage, but means it takes over 10 years to break even, which isn't compelling, for me.)

dunstonh

AVCs generally have very poor investment ranges. The charges used to be very competitive but nowadays that isnt the case with the other options coming down in cost. AVCs are linked to the occ scheme and benefits have to be taken at the same time as the occ scheme unless trustees agree to overule (I have tried this about 4 times in recent years and two agreed and two didnt). 25% tax free lump sum is not a requirement to exist at this time on AVCs.

Added years is usually the most expensive option but the one that can give you the most at the end of the day. It isnt much use for phased retirement but it is the one with the guarantees.

Stakeholder. more flexible than an AVC regarding commencement date. Tax free lump sum of 25% currently available. similar charges but no real other advantage as fund ranges tend to be weak.

Personal pensions. same as stakeholder but with greater fund ranges. Can be cheaper or more expensive than stakeholder depending on provider. However, most mainstream PPPs are the same as the stakeholder except bigger fund range. Fund supermarket/hybrid SIPPs can fall between PPP and SIPP with fund ranges much higher (300-1000 mark).

SIPPs. The most expensive option but the one that does offer the largest investment choice. Unless you use the investment options then the SIPP becomes an expensive folly.

but I get the idea from other threads that SIPPs are generally cheaper than stakeholders.

Completely the oppposite. A SIPP is always the more expensive option on like for like basis than a stakeholder and most personal pensions.

EdInvestor

SIPPs can be cheaper or more expensive, it depends on what you want to invest your money in and whether the SIPP chosen is optimal for that type of investment.

What level of retirement income are you expecting with pensions acquired so far?There are various "break points" where it is more desirable to have tax free income coming from ISAs than taxable income coming from pensions: eg at the 20k point where you would suffer punitive withdrawaql of age allowance, and at the 10k point up to which pension income is almost tax free.Plus of course you wouldn't want to be paying higher rate tax in retirement if you could avoid it...

david_c_6

EdInvestor wrote:

SIPPs can be cheaper or more expensive, it depends on what you want to invest your money in and whether the SIPP chosen is optimal for that type of investment.

Sorry, I guess I was thinking of something like the Hargreaves Lansdown Vantage (?) SIPP, which seems to have charges in the same ballpark as the Fidelity FundsNetwork that I'm using for my ISAs (via Bestinvest).

EdInvestor wrote:

What level of retirement income are you expecting with pensions acquired so far?There are various "break points" where it is more desirable to have tax free income coming from ISAs than taxable income coming from pensions: eg at the 20k point where you would suffer punitive withdrawaql of age allowance, and at the 10k point up to which pension income is almost tax free.Plus of course you wouldn't want to be paying higher rate tax in retirement if you could avoid it...

Retirement income? I've asked for a state pension forecast, but in the meantime I think I can assume that at retirement I would have slightly less than the current 44 qualifying years, but more than the anticipated 30. And I've been contracted out of S2P, except for maybe two or three years at the start of my working life. So let's assume a full basic state pension at £4394. My current pensionable service is just under 20 years, which gets me 20/80 of my salary, so £7400 per year, plus 20 x 3/80 = £22,000 lump sum. If I carried on in the scheme to age 60, I'd have 31 years 258 days pensionable service, which would give me an £11,830.21 annual pension and a £35k lump sum. But I think it would be very unwise to count on the scheme still existing and me still being in it by then.

The ISA vs pension question might be a bit of a red herring at the moment, since I've used up my ISA allowance for this year, and probably have enough to use up next year. So it's either stick the money in some kind of pension, or pay tax on it and save/invest it somewhere else. (I expect to have spent the ISA savings on a house eventually, by the way, not to be using it for a retirement income.)

EdInvestor

I expect to have spent the ISA savings on a house eventually, by the way, not to be using it for a retirement income.

Why?

BTW when you say you have used your ISA, are you referring to cash or investment ISA?

I'm wondering if you shouldn't perhaps be using extra money to overpay your mortgage at the moment- at current interest rates it's a pretty good return.

dunstonh

It would perhaps be better to use ISAs for retirement planning and unit trusts for the house.

david_c_6

I don't own a house at the moment. (A sensible chap might say that the money was better spent that way than on retirement planning, but I can't save fast enough to catch up with house prices at the moment, and I don't feel too secure in my job. I figure it's better to do something about pensions than not to do anything about either.) I've used up my whole maxi ISA allowance on an investment ISA, but it is split between equities and bond funds to de-risk it to some extent. I'd started with the assumption that my company pension (with as much AVCs for added years as I could manage) should be my retirement "fund" and the ISAs were primarily for medium-term saving for an eventual house-purchase. But maybe I should be thinking more in terms of company pension plus ISA for retirement (having read the pension vs ISA debate), with unit trusts plus cash savings for the medium-term savings. In which case, I should probably have a higher proportion of equities in the ISA because it'll be a much longer-term investment. On the other hand, having used up my ISA allowance, putting spare cash into unit trusts outside of an ISA means foregoing the tax relief that I'd get if I put it into some kind of pension.

EdInvestor

If you are a basic rate taxpayer, the tax relief doesn't amount to much, as you pay tax on the pension in retirement - it's deferred tax really.The only benefit is the 25% tax free cash, which might be removed, and is anyway outweighed by loss of the capital and restrictions on the income.