Local Authority Pension - Best options to top up?

taktikback

Interesting debate this one. I hadn't considered that ARCs would be indexed from point of purchase rather than based on retirement date. I can't find any reference to that in the literature. I await other's input on that with interest.

I don't quite get Jem's calculation that the same initial payments to either AVCs or ARCs would result in a different cost to the person paying in. Both attract the same tax break don't they? so the money going in should be the same - it's just the outcomes that will be different.

The calculation put forward is £43k for AVCs with 7% growth (which is fairly optimistic in fairness) againt £53k equivalent pot for the ARCs based on the cost to purchase the relevant annuity. If the ARCs aren't indexed from purchase, that would come down to more like £35-40k.

Plus the pension the ARCs buy is taxable on the way out - potentially the whole £43 AVC pot could be tax free.

That was the logic I applied when I went for AVCs, but I'm not saying I got it right - I look forward to further input!

jem16

taktikback wrote: »

Interesting debate this one. I hadn't considered that ARCs would be indexed from point of purchase rather than based on retirement date. I can't find any reference to that in the literature. I await other's input on that with interest.

I'm going with the Teachers' Pension Scheme here as most Public Sector pensions follow the same rules. However I realise it could be different which is why I told the OP to check it out.

AP is increased in line with monthly increases in the rate of inflation both before the AP comes into payment (‘a pre payment increase’) and also whilst it is being paid (‘an in
payment increase’).

taktikback wrote: »

I don't quite get Jem's calculation that the same initial payments to either AVCs or ARCs would result in a different cost to the person paying in. Both attract the same tax break don't they? so the money going in should be the same - it's just the outcomes that will be different.

Yes that's correct. However with the ARCs the OP was taking the payment over 10 years. Initially I had calculated the AVCs over 19 years as I thought the OP's wife would pay until retirement.

The calculation put forward is £43k for AVCs with 7% growth (which is fairly optimistic in fairness)

That was with 19 years payment though. With 10 years payment so it is the same as the ARCs, the pot would be around £29,697.

So it's £29,697 against £53k.

taktikback

OK - that makes sense - so assuming the indexing is as the teacher's scheme, it comes down to whether your circumstances favour a lump sum or an indexed linked pension on retirement. Interestingly, if you were to commute your main pension benefits at the 12:1 going rate, you would have to give up £2475 to get a £29697 lump sum

One other point of interest - can other existing pots be used as lump sum inputs to the AVC pot - such as an old £25k pot from a protected rights contract out? or would that count as recycling just to maximise a tax free payout?

jem16

taktikback wrote: »

Interestingly, if you were to commute your main pension benefits at the 12:1 going rate, you would have to give up £2475 to get a £29697 lump sum

Yes the commutation rate is dire but it depends what scheme you're part of as some include an automatic lump sum and some you have to commute to get the lump sum.

One other point of interest - can other existing pots be used as lump sum inputs to the AVC pot - such as an old £25k pot from a protected rights contract out? or would that count as recycling just to maximise a tax free payout?

I don't know.

kidmugsy

jem16 wrote: »

The LGPS is fully funded unlike other public sector pensions.

Yes, but it's the taxpayer providing most of the funding, isn't it, and guaranteeing the payouts?

jem16 wrote: »

As to ARCs there is no employer contribution so nothing to do with the taxpayer.

Again, if the return is a guaranteed defined benefit, it must be the taxpayer providing the guarantee, mustn't it? Who else is there to provide it?

jem16

kidmugsy wrote: »

Yes, but it's the taxpayer providing most of the funding, isn't it, and guaranteeing the payouts?

You could say that of any private final salary scheme with a pot that's invested just like the LGPS.

However please let's not have this thread end up as an argument against public sector pensions.

jabbahut40

jabbahut40 wrote: »

Thanks Jem16. Very clear.

Thanks for all your help Jem16. Out of interest are you a member of the LGPS scheme and did you go down the ARC or AVC path yourself?

Jabba

jem16

jabbahut40 wrote: »

Thanks for all your help Jem16. Out of interest are you a member of the LGPS scheme and did you go down the ARC or AVC path yourself?

Jabba

I'm a member of the Teachers' Pension Scheme which is why I'm asking you to check out the situation with the LGPS before pursuing either option.

I currently use the Additional years option which is no longer available but is similar to the ARC path, only probably better.

kidmugsy

jem16 wrote: »

You could say that of any private final salary scheme with a pot that's invested just like the LGPS.

Yeah, but then it's the shareholders coughing up, not the taxpayer.

taktikback

I found the small print for the Wiltshire LGPS ARCs and it confirms that they are indexed linked from purchase.

However, ARCs are age dependent which affects the calculation. Using the ARC calculator, I note that my wife (age 50) would have to pay £134 per month to get £1000 extra pension over the 10 year period - which brings down the equivalent extra pension to £873 (compared with the proposed AVC pot figures)

The AVC £29697 pot might be tax free - the ARC at £873 would give an income of about £700 yearly after basic rate tax.(at today's rates) which might be £1000 in 10 years with indexation

Have I got that right?. It all looks a bit closer than suggested previously