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Confused about AVCs vs. buying additional pension - help please!
smellymel74
Posts: 102 Forumite
Hi all. Wonder if anyone can illuminate me on the different pros and cons of taking out an AVC with my employers pension scheme versus buying an additional pension? I've been reading mounds of literature from my pension provider. But am still none the wiser!
I'm a member if the Teachers Pension Scheme, an average salary scheme, and joined pre-changes in 2007 (so get a slightly better deal than new members). Problem is I started paying in late - only have 5 years qualifying at mo and I'm almost 40 because I worked PT to begin with - and I'm looking to try and make up for some of that lost time by topping my pension up.
The scheme offers 3 options - 1) transferring benefits from another scheme (not an option - don't have one as I worked abroad in my youth and didn't bother with a pension!), 2) taking out an AVC with the scheme in-house provider Prudential, or 3) buying an additional pension, which I could do either by a lump sum or by having contributions deducted from my salary, both of which seem to allow me to claim tax back. My dad reckons AVCs are always a good idea (provided you can afford them, which I thankfully could) but given I could get tax back if I bought an additional pension, I'm struggling to see what the benefits of AVCs are over buying an additional pension, though I'm sure that because I'm thick when it comes to the technicalities of pensions! Any help much appreciated
I'm a member if the Teachers Pension Scheme, an average salary scheme, and joined pre-changes in 2007 (so get a slightly better deal than new members). Problem is I started paying in late - only have 5 years qualifying at mo and I'm almost 40 because I worked PT to begin with - and I'm looking to try and make up for some of that lost time by topping my pension up.
The scheme offers 3 options - 1) transferring benefits from another scheme (not an option - don't have one as I worked abroad in my youth and didn't bother with a pension!), 2) taking out an AVC with the scheme in-house provider Prudential, or 3) buying an additional pension, which I could do either by a lump sum or by having contributions deducted from my salary, both of which seem to allow me to claim tax back. My dad reckons AVCs are always a good idea (provided you can afford them, which I thankfully could) but given I could get tax back if I bought an additional pension, I'm struggling to see what the benefits of AVCs are over buying an additional pension, though I'm sure that because I'm thick when it comes to the technicalities of pensions! Any help much appreciated
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Comments
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Additional pension (as known as added-years) is better majority of the time as this would increase your defined benefits (DB) where employer takes all the risk, as opposed to a money-purchase AVC with the Pru where the risk is all yours.Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
Additional pension (as known as added-years) is better majority of the time as this would increase your defined benefits (DB) where employer takes all the risk, as opposed to a money-purchase AVC with the Pru where the risk is all yours.
It is down to personal choice, but I am just finishing off buying the maximum allowed additional pension in the TPS. I prefer the fact I know exactly what I am buying rather than hoping for better growth within a fund. But now that I am reaching the end of buying additional pension I am looking at where next to invest. I am not interested in the Pru's AVC's, so I have just started investing a SIPP.Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop0 -
It is personal choice to a certain extent, but it is also financially better for most. The main advantage of the AVC is that if your DB pension requires commutation of benefits to provide you with a lump sum, the commutation rates are normally very poor value, and so by having an AVC you can opt to not commute and take the lump sum from the AVC instead.chucknorris wrote: »It is down to personal choice, but I am just finishing off buying the maximum allowed additional pension in the TPS. I prefer the fact I know exactly what I am buying rather than hoping for better growth within a fund. But now that I am reaching the end of buying additional pension I am looking at where next to invest. I am not interested in the Pru's AVC's, so I have just started investing a SIPP.Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
It is personal choice to a certain extent, but it is also financially better for most. The main advantage of the AVC is that if your DB pension requires commutation of benefits to provide you with a lump sum, the commutation rates are normally very poor value, and so by having an AVC you can opt to not commute and take the lump sum from the AVC instead.
I have no intention of taking a tax free lump sum, with a commutation rate of 1:12, IMO it is much better value to take it all as pension. I really have no need for the cash (that would have potentially been a reason to take a lump sum).
Unfortunately in the TPS (at least in the later scheme which I am part of) you cannot elect to only take the tax free lump sum for the AVC (like you can in the LGPS), so you have to take it also from the DB part as well, and as I said above I think it is far better value to take it all as pension.
EDIT: Obviously I will be taking the tax free lump sum from my SIPP (and smaller private pension that I invested in years ago).Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop0 -
Buying the added pension will be the better thing to do, IF you wont be retiring early and getting an actuarial reduction.
Better, if you want to retire early, to set up a DC pension instead of AVCs that are linked to your main pension as this could provide money to live on so you dont have to take your TPS early/reduced.0 -
Personally, I pay into the TPS (any teacher would be mad not to) and also into a SIPP rather than the AVC's.
Like you I won't have the full TP as I came into teaching later. I also missed the boat in transferring my other pension into the TPS as you only have 1 year to do so.
Therefore I have opted to continue paying into a previous pension which I transferred into a SIPP.
I must admit I do question whether I should continue to do so or would I be better off following Chuck's lead and buying additional pension instead ? (any advice anyone?) - Thanks atush for the post above !!
When I did the numbers, even without the full entitlement I felt that I will accumulate enough pension to give me a half decent retirement. Therefore I have opted for extra flexibility by paying into my own SIPP that is totally separate to the TPS. I can now use this to top up my TPS if required, or maybe (if extremely lucky), generate enough money in this to pay for an early retirement.
Like Chucknorris stated above, I definitely do not want to throw away chunks of the TPS on either buying a lump sum or taking an actuarial reduction by retiring early. Therefore I feel that the SIPP will buy me that flexibility which has become the latest pension buzzword!
I also think that should my career take off and I end up as a Head or on some other similar financial package, then the TPS would be paying me more than enough in retirement anyway. So then that extra flexibility from the SIPP may well be more valuable than the buying of additional pension.
However, I can see the definite advantage of buying the additional pension and like I said, I am not 100% sure I am doing the right thing anyway!!
I guess the key thing is that you are thinking of supplementing your pension and whichever way you go about it, this can only be a benefit.0 -
smellymel74 wrote: »I'm a member if the Teachers Pension Scheme, an average salary scheme,
Not yet it isn't. At the moment it's still a final salary scheme but will change to a CARE scheme from April 2015.My dad reckons AVCs are always a good idea (provided you can afford them, which I thankfully could) but given I could get tax back if I bought an additional pension, I'm struggling to see what the benefits of AVCs are over buying an additional pension
You also get tax relief with AVCs so no different to Additional Pension.
The main differences are that AVCs are invested and returns unknown. Additional Pension buys you an exact amount of pension at no risk to yourself - however it will be much dearer.
AVCs are becoming more obsolete now with more flexibility and choice available in a Personal Pension.0 -
Wow, brilliant advice thanks guys! I learn something every time i come on here!
I should have said that I'd LIKE to retire early, which is kind of why I'm thinking about planning now 15-20 years ahead. I was hoping to retire (or worst case scenario, go PT) at age 55, though my pensionable age (under the old pre 2005 scheme) is 60. By age 55, I'll have 20 years contributions and an average salary of roughly £50K. I was hoping that by doing something now to top up the early years I missed, I'd give myself a better chance of being able to retire at 55.
It sounds like buying additional pension is more suitable for me than AVCs, but I hadn't thought about getting a SIPP so the decision may actually be between additional pension and a SIPP - a bit more mulling it over needed I think. Like the idea of a SIPP though as, like exmugpunter says, if I understand correctly it could mean I'm able to retire (or at least go PT) at 55 but without having to take my teachers pension early (& thus heavily reduced) then live of the SIPP until I can draw my teachers pension. Just wish I'd done something about it earlier, like you exmugpunter!
Over more question please - Atush and YourHero mention some benefits of AVCs if you have to take a lump sum - under the old teachers pension scheme that I'm in, I get an automatic lump sum. Does this mean AVCs might be better than a SIPP after all?0 -
If you receive at automatic lump sum then the money-purchase AVC is an inferior option (although the charges may be quite competitive) and you have to take the benefits in accordance with the main scheme rules, i.e. normal retirement age of 65. Better off using a personal pension, or a SIPP if you require the extra investment choice, particularly as you mentioned early retirement - as current rules stand, you can draw private pensions from age 55 onwards (due to rise to 57 from 2028 though, 10 years before SPA).smellymel74 wrote: »Wow, brilliant advice thanks guys! I learn something every time i come on here!
I should have said that I'd LIKE to retire early, which is kind of why I'm thinking about planning now 15-20 years ahead. I was hoping to retire (or worst case scenario, go PT) at age 55, though my pensionable age (under the old pre 2005 scheme) is 60. By age 55, I'll have 20 years contributions and an average salary of roughly £50K. I was hoping that by doing something now to top up the early years I missed, I'd give myself a better chance of being able to retire at 55.
It sounds like buying additional pension is more suitable for me than AVCs, but I hadn't thought about getting a SIPP so the decision may actually be between additional pension and a SIPP - a bit more mulling it over needed I think. Like the idea of a SIPP though as, like exmugpunter says, if I understand correctly it could mean I'm able to retire (or at least go PT) at 55 but without having to take my teachers pension early (& thus heavily reduced) then live of the SIPP until I can draw my teachers pension. Just wish I'd done something about it earlier, like you exmugpunter!
Over more question please - Atush and YourHero mention some benefits of AVCs if you have to take a lump sum - under the old teachers pension scheme that I'm in, I get an automatic lump sum. Does this mean AVCs might be better than a SIPP after all?Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
smellymel74 wrote: »Over more question please - Atush and YourHero mention some benefits of AVCs if you have to take a lump sum - under the old teachers pension scheme that I'm in, I get an automatic lump sum. Does this mean AVCs might be better than a SIPP after all?
The TPS never allowed you to take the lump sum from the AVC pot regardless of the fact that you have an automatic lump sum entitlement.
AVCs with the TPS are not linked to payment of your TPS and you can access the AVC pot from age 55. However this is not to say that the Prudential will offer the flexible withdrawal that the new pension rules will allow from April 2015.
https://www.teacherspensions.co.uk/members/faqs/new-and-active-teachers/avcs.aspx
The only real reason to use the TPS AVC scheme is if the charges are particularly good - something which I've never looked into as I chose to buy back years, something which is not allowed now.0
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