LGPS AVCs - Advice sought please

IBM01

Hi,

I have a friend who works for a local council and has about 20 years of local government pension built up, but is worried about their job and is asking about whether Additional Voluntary Contributions (AVCs) are a useful addition to their investments.

The reason behind their question is that:

1) They are being encouraged by the local council to take up the offer of AVCs with Prudential who are the Council's AVC provider. These AVCs sit as a separate fund, not part of the defined benefit Local Government Pension Scheme (LGPS).

2) They are concerned that their job may not be safe long term i.e. they feel ok for the next 12 months, but then there may be further cuts or restructuring etc.

At this point I should say that this person is about 50 years old, 'comfortable' in terms of finances and has made provision for a 'rainy day' should the worst happen. Hence the reason for asking is more about whether it makes best use of their spare cash after payment of all bills and contributing to an ISA etc.

With the above points in mind I guess what they are asking is:

A) Is it a good idea to start to put some money into AVCs bearing in mind that they can afford to do so at present and should their council job end they will not have the opportunity to take up the offer with a private employer?

I would be happy to receive any comments/advice/observations and pass them on.

Thanks in advance to anyone who replies.

redbuzzard

I don't know the in and outs of the LGPS; but AVCs in the ordinary way can be a useful way to fund the pension commencement lump sum (PCLS) with a defined benefit pension.

It doesn't usually make sense to commute defined benefits for cash, but using the AVCs means you can effectively gross up some savings if you are prepared to tuck them away until you take the pension. I have just done this (quite by accident) with a small DB pension, though I overshot slightly and had to use £6k to buy a trivial annuity.

I have a larger DB pension to take in 2018; I have no AVCs with that, but some of the fund is in the DC section and I will take that as PCLS.

With the LGPS it may, as suggested, be attractive to buy extra benefits from the scheme, if permitted - or not. As I said I have no experience of LGPS.

jamesd

You might find it helpful to edit your post and change the title to something like "LGPS AVCs - Advice sought please". There are several people here familiar with the LGPS and that will help to attract them to this discussion. If you choose Edit then Advanced there is a place to make that change.

AVCs for the purpose of being an efficient way to get a lump sum from many of the government final salary pension schemes won't be available from private sector employers, who will almost certainly offer a defined contribution pension instead. But standard defined contribution pensions can be taken from age 55 with 25% tax free lump sum available. The income can be deferred or taken by annuity purchase (not a good deal at 55) or income drawdown, which means leaving the money invested and taking an income from it.

Drp8713

Its tax free when you pay it in and its tax free when you take it out providing the avc fund is within your maximum lump sum.

Assuming your investment choices arnt too wild it is a good way to save and not pay tax

redbuzzard

Drp8713 wrote: »

Assuming your investment choices arnt too wild it is a good way to save and not pay tax

It's better than that, as you get the tax relief on the way in.

I'm sure you meant that, just making the point that it is much more effective than saving in a "tax free" ISA.

jem16

IBM01 wrote: »

Hi,

I have a friend who works for a local council and has about 20 years of local government pension built up, but is worried about their job and is asking about whether Additional Voluntary Contributions (AVCs) are a useful addition to their investments.

The reason behind their question is that:

1) They are being encouraged by the local council to take up the offer of AVCs with Prudential who are the Council's AVC provider. These AVCs sit as a separate fund, not part of the defined benefit Local Government Pension Scheme (LGPS).

With the LGPS, AVCs are very useful as they can be used to take the tax-free lump sum as opposed to commuting the pension.

However pre 2008, some of that tax-free lump sum comes automatically and cannot be used for inverse commutation so you need to take that into account.

Just be careful as the Prudential introduced a penalty charge if the AVC was cashed in before 5 years. I'm not sure if it applies with all councils but your friend should check. There may be other AVC providers without this penalty.

A) Is it a good idea to start to put some money into AVCs bearing in mind that they can afford to do so at present and should their council job end they will not have the opportunity to take up the offer with a private employer?

I'm not sure what your friend is thinking about here but it's more than likely that you wouldn't be allowed to continue paying in after leaving the Council. You definitely can't with the main scheme but AVCs may be different so worth checking.

jem16

redbuzzard wrote: »

It's better than that, as you get the tax relief on the way in.

I'm sure you meant that, just making the point that it is much more effective than saving in a "tax free" ISA.

He did say that in his first sentence. Perhaps you missed it?

Drp8713 wrote: »

Its tax free when you pay it in and its tax free when you take it out providing the avc fund is within your maximum lump sum.

redbuzzard

jem16 wrote: »

He did say that in his first sentence. Perhaps you missed it?

No, I didn't miss it, and I think it merits spelling out for some people, if not the OP. ISA's are often referred to as tax free savings, but AVCs are more tax free.

But thank you for your question. Hopefully there is now no question of anybody not getting the message:T

jem16

redbuzzard wrote: »

No, I didn't miss it, and I think it merits spelling out for some people, if not the OP. ISA's are often referred to as tax free savings, but AVCs are more tax free.

AVCs have the potential to be better but it depends on the main scheme they are attached to. In some cases the only gain is the 25% tax free from the AVC.

IBM01

Hi again,

Firstly many thanks to redbuzzard, jamesd, Drp8713 and jem16 for the replies, comments and advice that they posted.

It seems like the fact that my friend can afford to put some 'spare' money into AVCs makes sense in terms of it being 'tax-free' saving rather than it sitting in a low interest account.

For clarification I thought that I should add the following info that has now been confirmed:

• The Prudential apparently run most of the LGPS AVCs

• My friend is aware that any money they put into AVCs is locked in until pension age

• They have now had it confirmed by Prudential that they cannot make any AVC contributions should they leave local government employment. The amount they have put into AVCs would remain invested and could be accessed at pensionable age

• They have had it confirmed by Prudential that Annual Management fees are between 0.6 and 0.75% with no cost for transferring between or changing funds. The with profits fund does have a Market Value Reduction (MVR) that would be applied apparently.

• Prudential have also confirmed that there is a penalty charge if the AVC was cashed in within 5 years. This won't apply in my friends case as they understand it is a long term investment.

With regard to funds they have identified that they have Medium to Higher and High risk outlook. As the money would be doing nothing in a UK bank account they are prepared to 'speculate' a little in the hope of getting a better return long term.

Does anyone have any comments with regard to the funds offered by Prudential in the Medium to Higher and High risk bracket please? The list can be found at: http://www.pru.co.uk/retire/retirement_zone_localgov/home/funds/lincolnshire/

I realise that any advice is not to be treated as 'financial advice' just guided opinion to help make sure they have considered their options.

Thanks again in advance to anyone who replies

pandora205

I pay into LGPS and also contribute to AVCs although my provider is Clerical Medical. The main advantage is that as a higher rate tax payer I gain considerably as these come out of my salary before tax. The AVCs can be taken as part of the cash pension pot but as mentioned above this would be added to the pre 2008 lump sum and cannot exceed 25% of a notional pension pot. As mine won't and I've been contributing for over 30 years so far, I don't think it is likely that your friends would (but the calculation needs to be checked). Incidentally the pre 2008 lump sum can be commuted (at least in my LA) but the rates are dire, even worse than the other way around.
When I attended a talk on AVCs last year (actually run by Prudential who are the other AVC provider in my LA) the rep advised paying in a large amount during the final year of earnings before retirement as this reduces the tax even further and beats other interest rates hugely. I'm not sure if I'll be able to do this but it is something to think about.
With regard to actual funds, my AVCs automatically move to the 'Cautious Managed' option for the last few years, so it is only the earlier years where there was a choice of funds.