Added Pension vs AVCs Revelation!

Bravepants

Well I'm a member of the Civil Service pension scheme and I've been paying AVCs with Scottish Widows for about 4 years or so. The other day my work's pensions person sent round an email about Added Pension. She does this every year but in the past I thought "well I don't need added pension as I have AVCs". After a few sums and a look at the calculator this year I suddenly realised that I would have been better off paying Added Pension (previously Added Years) all along, what with it being Defined Benefits rather than Money Purchase! What a muppet! So I've now changed my contributions and instead of sending 10% to my AVC, I've cut that down to £50 a month, and setup 10% to Added Pension from April! I wish the difference had been made a bit clearer to me earlier on! Oh well you live and learn! Anyone else had any similar experiences?

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hugheskevi

in the past I thought "well I don't need added pension as I have AVCs".

That would rather depend on the amounts saved, but in any event they are very different financial products. And as with most financial products, it is rarely an either/or choice, both is usually an option too.

After a few sums and a look at the calculator this year I suddenly realised that I would have been better off paying Added Pension (previously Added Years) all along,

Given the uncertain nature of Defined Contribution pensions, you won't know which would have been best until the pensions are taken. The calculators just make crude assumptions to give an illustration.

what with it being Defined Benefits rather than Money Purchase

Defined Benefit isn't necessarily better than Money Purchase. For example, for someone in a position to take advantage of flexible drawdown, money purchase contributions may be very attractive as the pension can be used to create capital, whereas Added Pension will mostly provide income. In this particular case Money Purchase would also diversify your risk exposure to policy change in the pension scheme (eg RPI-CPI) which some may find attractive.

Added Pension is 'safe' in that you know what you will get in return which based on the discount rate used in the pricing will be a return of CPI+3%. That is an okay but unremarkable return - it is protected from inflation and gives a small real return with minimal risk. However, the AVC scheme may well beat that return (and based on historic returns, there is a high probability that it will), albeit with volatility/risk.

Anyone else had any similar experiences?

Personally I'd prefer a personal pension over the AVC scheme for more investment choice.

But given the differences between the AVCs and Added Pension, it is comparing apples and pears. The most suitable option will depend on individual circumstances.

chucknorris

I'm in the TPS and my order of preference is:


1. Additional pension purchase
2. SIPP (private pension)
3. AVC


I haven't bothered with AVC's because I prefer to invest in a SIPP (more control, less fees than AVC). I finish buying the max allowed additional pension this December, from then on it is minor inflation rises only, so I will be focusing on my SIPP.

Bravepants

Thanks for your comments.

Yes I was debating the personal pension vs AVC route with myself last night. I should be able to transfer out my AVCs to a personal pension and continue with that. Regarding SIPPs though, I don't really think I have the investment experience to manage one of those, although I have a S%S ISA and so far so good...but the usual ups and downs apply of course.

I will take a look at personal pension options though.

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chucknorris

Bravepants wrote: »

Thanks for your comments.

Yes I was debating the personal pension vs AVC route with myself last night. I should be able to transfer out my AVCs to a personal pension and continue with that. Regarding SIPPs though, I don't really think I have the investment experience to manage one of those, although I have a S%S ISA and so far so good...but the usual ups and downs apply of course.

I will take a look at personal pension options though.

P

I'm about as far away from being an expert in shares as you can be, I only started my SIPP last month in fidelity's allshare ftse tracker. It is a passive investment with a low fee (0.3%, would be higher for some but I have over 250k with fidelity and therefore benefit from reduced fees).

OldBeanz

When I started my AVC's a £100k pension pot(which is what I am aiming for) would have bought a pension of £15k pa now it would buy £4k in an annuity.
However my wife is 7 years younger than me and because of breaks for children she will get 30% of her pension at 60 and the rest at 67 some 14 years after I reach my main pension.
As I am tweaking my CS pension to go over £20k pa I can now use the £100k additional pension in flexible drawdown.
So at the time I took a risk (having children I did not feel I could commit to additional years and actually took a 5 year break in payments) and the risk would not have paid off if I took an annuity but has because I can run this pot down, to allow my wife to retire earlier.
Moral - don't beat yourself up, who knows what the rules will be and what else will change when you retire.

Bravepants

Chucknorris: I'm with Fidelity for my S&S ISA. It's interesting that you consider them good enough to look after your 250k. I will definitely check them out regarding a SIPP.

Bravepants

OldBeanz wrote: »

Moral - don't beat yourself up, who knows what the rules will be and what else will change when you retire.

Yes, agreed. I'm happy with myself for actually locking money away as I cannot spend it and that gives me a comfortable feeling. So I'm not beating myself up about the AVC/added pension thing, I just want to give myself a better chance at a better return. I will aim to add as much as i can to my main pension (£6100 pa at the moment), but also investigate a SIPP and see if i can transfer my AVCs to it.

Thanks again for everyone's comments.

P

geelamch

I read your post and have to agree that whilst avc against pension may be a big decision the mere factor that you are doing something has to be the way forward.
My situation is similar,I am final salary 34 years contribution and also pay £50 weekly to avc ( employer only £10 matching) .
I don't know the ins and outs of the best way to utilise max returns but feel that the fact we do something must increase our chances of a reasonable return.
My pension should be ( estimate )
Lump sum £140000
Annual. £21000
Savings. £70000
Shares etc. £30000 ?

Wife is 8 years younger than me so her pension is negligible if I go at 55 ,however we have balanced up quality of life ie: health ,physical attributes and fun.

This post is probaly (unsound) but I just wanted to comment on the fact that irrespective of returns etc the fact you are doing something is to be applauded.

Annie1960

I was in the civil service classic scheme until I took early retirement almost three years ago now.

I saw an IFA at the time when I was considering added years vs AVC. I cannot recall all the issues, but there are definitely differences between an AVC and added years. The ones that mattered to me were that added years were very inflexible - once you had chosen how much to contribute you could not vary it. For example, if I had chosen 10% I would have had to have paid that until I retired. The other factor that turned me off added years was that I would also be paying for more dependent's benefits, which I did not want.

The AVC was better for me. My IFA explained that the management fee was low as the civil service do a lot of the admin work themselves. It is also a lot more flexible (I increased and decreased the amounts I paid a number of times over the years, and made lump sum payments when the stock market was low). An AVC was better for me, but if my circumstances had been different maybe added years would have been better.

OldBeanz

Bravepants wrote: »

Yes, agreed. I'm happy with myself for actually locking money away as I cannot spend it and that gives me a comfortable feeling. So I'm not beating myself up about the AVC/added pension thing, I just want to give myself a better chance at a better return. I will aim to add as much as i can to my main pension (£6100 pa at the moment), but also investigate a SIPP and see if i can transfer my AVCs to it.

Thanks again for everyone's comments.

P

Just ensure you compare charges. The CS will have a good deal with the AVC's and a Personal Pension is reckoned to be cheaper than a SIPP for most.