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To AVC or not?

Mish_Mash
Posts: 98 Forumite


I am 34 years old and have been a member of my companies final salary pension scheme for 9 years. The scheme pays approx 2/3rds of your salary in retirement, based on you having worked for the company for 35 years. Currently, based on my years service and salary, I would be entitled to between 5 - 6k a year (and 20 - 25k when I retire). I am intending to stay with my company for a least another year.
I have no other pensions provision. I live by myself and have a hefty mortgage so I don't really have the capital to pay into a pension. I do however have investments (cash and investment isas) so feel that I should be reasonably ok when I get get to retirement age.
I am a bit worried about my pension planning and am not sure if I am doing the right thing. Should I be putting some more money into my pension? Does it sound like my current provision is ok? I know one of the biggest concerns is financial security around Final salary pension scheme - I assume I should be ok as I work for one of the UK's largest Pensions Providers so I don't think it's likely that they will bankrupt the fund.
Any advice would be welcome.
I have no other pensions provision. I live by myself and have a hefty mortgage so I don't really have the capital to pay into a pension. I do however have investments (cash and investment isas) so feel that I should be reasonably ok when I get get to retirement age.
I am a bit worried about my pension planning and am not sure if I am doing the right thing. Should I be putting some more money into my pension? Does it sound like my current provision is ok? I know one of the biggest concerns is financial security around Final salary pension scheme - I assume I should be ok as I work for one of the UK's largest Pensions Providers so I don't think it's likely that they will bankrupt the fund.
Any advice would be welcome.
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Comments
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Cant give advice as we dont know your circumstances. However, AVCs are on their way out. There is no requirement for schemes to offer AVCs and many are now closing them to new entrants. The main benefits of AVCs have been watered down and they often look like the poor investment option compared to other modern investments when once they looked like a good value option.
If you arent intending to stay with the employer then I see little benefit of paying into an AVC. A personal/stakeholder/self invested pension or ISA may be more suitable.
The poor quality investment options with most AVCs and the tie in with the occupational scheme and inability to change providers is the main negative. The old positive of low charges isnt much nowadays as charges have come down and some AVCs are now more expensive than modern alternatives.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
I'm assuming that you're not (yet) a higher rate tax payer but could be one in the future, a better time to make large pension contributions due to the higher rate tax relief.
You should still be investing the money rather than using cash accounts, though. One way to help that is that from next April you'll be able to transfer cash ISA money into a stocks and shares ISA and use it for investments.
Your existing contributions get you to the 9-10,000 pension that will use the personal and age allowances, once you include the state pensions, so there's clearly time to delay pension contributions so long as you are investing for the long term in some way.
As time goes on you should look to plan for maximum tax efficiency in retirement. Since age allowance starts to be reduced at around 21,000 and your anticipated taxable income is around that, if you become a higher rate tax payer you may find it useful to use investment bonds as a tax wrapper, once you are fully using your ISA limit each year. The money from these won't count as taxable income so it'll work with the similarly treated ISA investments to give you tax free income and preserve the age allowance.
So, I suggest:- maximum stocks and shares ISA use now.
- investing outside stocks and shares ISA if more money is available.
- deferring additional non-work pension contributions until either you become a higher rate tax payer or it seems clear that you won't. Take all available employer contribution matching whenever it is offered.
- if you become a higher rate tax payer also consider investment bonds as another investment tax wrapper that can produce reduced tax income in retirement.
- if you do find yourself married sometime, each of you gets a personal allowance, so balance the pension to avoid as much tax as possible. Additional pension contributions for your partner may well be better than for you.
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Thanks James. I think I'll take your advise re stocks and shares ISA's. I'll also look into the bonds, I am not too familiar with how these work or the typical returns but I'll do some research and, if needs be, consult a Financial advisor, for advice.0
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Investment bonds work pretty much like ISAs: just a tax wrapper within which you hold fund investments. Some significant differences in tax treatment because they are an insured product and the tax edge doesn't generally exist for a basic rate tax payer (except if age allowance is a factor) but really it's the investments inside that matter most, just as it is with ISA and pension investing.
As usual there are cheap and expensive ones and cheap and expensive vendors and like pensions significant variations in the ranges of investments available, from many hundreds to only a few. One difference is that there's an "allocation" concept that can increase the investment initial value above 100% by rebating some commission into the bond.
They aren't in any way like bank savings bonds.0
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