Scottish Widows Civil Service AVC

Bravepants

Hi there,

I just wonder if anyone has any advice please...

I have a company pension, but felt I needed to top it up a little so in 2008 I joined the AVC scheme through Scottish Widows. I'm in the 40% tax bracket so it made sense to me to do this at the time, saving 40% tax now and then likely only paying 20% on my retirement income from my investment.

Since I started in the AVC scheme the unit price has steadily increased. In the first year I paid in £260 a month into the scheme and when the annual statement arrived I was quite pleased to see that should I continue such payments I would possibly be getting a taxable pension of £2760 per year from the AVC alone. I was quite satisfied. In 2009 I increased my contributions to a little over £400 a month, again saving 40% tax. Anyway here is a summary of subsequent years' contributions, total transfer value and estimated taxable pension from my various annual statements. Statement dates aren't exactly annual because of some technical problem at Scottish Widows apparently!

Monthly contributions started 6th August 2008..

Statement Date Year's Contrib. Transfer value Est. Pension
22 June 2009 2827 2862 2760
15 October 2010 4836 9414 4610
6 April 2011 4892 13327 4322
26 October 2012 5343 18571 3360 (?!)

I'm trying to figure out what happened this year! Using rough calculations I pay on average £4932 per year. If I didn't contribute this to my pension, without 40% tax relief, this would result in my taking home roughly £246 per month extra. However according to my estimated pension of £3360, after tax at 20% I would take home £224 per month! It seems I'm actually worse off by paying into this AVC.

Anyone else in the Scottish Widows scheme noticed this? Is this an error by SW or what?

I note that the unit price of the scheme has increased, over the time I have contributed, from an initial 89p per unit to 124p per unit.

Thanks,
Paul

dunstonh

It seems I'm actually worse off by paying into this AVC.

That is not logical and would be wrong.

I suspect SW have changed the assumptions used on their example projections. Over the last few years you have seen providers move from single life, level annuity examples to 50% spouse, indexed annuities. Also, the projection rates have been falling since the last FSA review which recommended providers used projection rates that were realistic for the asset class you are invested in.

The example projections may or may not be realistic to your objectives. Or they may not have been realistic before but are now.

Bravepants

dunstonh wrote: »

That is not logical and would be wrong.

Thanks for your reply and well I hope you're right, but the figures seem to say different.

If I continue to pay the same amount each month (£411) for another 16 years (until I'm 60), retire and then live another 16 years drawing my £3360 before tax, surely I will have lost money.

Paul

dunstonh

Thanks for your reply and well I hope you're right, but the figures seem to say different.

They dont say that though. Look at the assumptions used with each set of figures and you will see that they have changed over time.

If I continue to pay the same amount each month (£411) for another 16 years (until I'm 60), retire and then live another 16 years drawing my £3360 before tax, surely I will have lost money.

No. Assumptions are just assumptions and they have no impact on reality. Indeed, statistically you are never going to get what the assumptions have projected.

jamesd

Bravepants wrote: »

If I continue to pay the same amount each month (£411) for another 16 years (until I'm 60), retire and then live another 16 years drawing my £3360 before tax, surely I will have lost money.

Do you have some reason to believe that you will live only 16 years instead of the 28 or so years that half of men that age can be expected to live to?

Annuity rates have dropped over the last few of years, particularly this year. That will have reduced the income value even though the transfer value has been increasing. So the capital after some assumed growth and continuing payments until retirement ends up decreasing in income level.

As an alternative you might consider income drawdown and divide the transfer value by 20 to get a reasonable income level accumulated so far. This won't include any allowance for growth or future contributions.