3.5 years to go - Pile into AVC's? 28 December 2014 at 2:05PM edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning 11 replies 1.6K views

Parking_Trouble

I have three and half years to go until 60 and drawing a DB pension with no actuarial reduction.

I have six years seven months of mortgage repayments to go. Staff mortgage - only £30 per month interest.

Considering working beyond 60. A year or two of drawing pension and salary is tempting.

Feels like I should now be putting as much as I can into AVC's to get maximum tax efficiency.

Also, if I can change my mortgage to interest only I could use the freed up cash to pay into AVC's. Then take that back out in the tax free lump sum at 60 to pay the mortgage off early.

Also I could liquidate some shares and use annual cash bonuses to free up funds to live off to maximise AVC's. I would need to hang on to some savings for emergencies/holidays, etc.

Is putting as much as possible into AVC's the right thing to do? I could take early retirement at any time to free up the funds if I really had to.

PeacefulWaters

My approach is pretty much this and should keep me out of 40% tax.

Exploit employer share schemes (running down cash savings and a single company shareholding that I'm overexposed too alittle too). Then switch the proceeds on maturity in to the AVC (which is matched by the firm) via salary sacrifice and then retire, taking the 25% lump sum and then drawing down from the remainder of the fund as required.

My AVC fund will be able to exploit Osborne's Budget changes. Make sure yours can - if not use a personal pension or SIPP in the same way.

kidmugsy

PeacefulWaters wrote: »

the AVC (which is matched by the firm) via salary sacrifice


My AVC fund will be able to exploit Osborne's Budget changes. .

Those are two very fine features you've got there, PW.

PeacefulWaters

kidmugsy wrote: »

Those are two very fine features you've got there, PW.

Although the latter may be a problem if I go before 55 and I've a few questions yet to ask the trustees on that.

My online quote service says I can take 25% AVC lump sum and transfer the rest of the money elsewhere. Assuming I can find an "elsewhere". No need to drawdown until after 55 though.

I'm quite keen to go before 55 and current projections are good for 53 assuming investment growth matches inflation.

Parking_Trouble

My employer only adds 5% to my AVC but still very good compared to putting the net income into alternative investment.

Got a (currently) profitable SAYE to run for another 18 months. Just started another but might cancel and put into AVC.

jamesd

Making more pension contributions seems sensible. You can also do things like using money transfer credit card deals or 0% for purchase credit cards and balance transfers to obtain extra money for three or more years to further increase the amount you can invest, knowing that the pension money will be available if for some reason you can't just get more cheap credit to refinance the deals as desirable before you retire.


There are some AVCs that have extremely restrictive policies, like requiring the purchase of an annuity. Be sure that you know what yours allows so you don't get trapped like that. Best deal tends to be using AVC to take 25% lump sum from the whole pension pot so the main part isn't reduced to provide lump sum.

jamesd

Parking_Trouble wrote: »

Also, if I can change my mortgage to interest only I could use the freed up cash to pay into AVC's. Then take that back out in the tax free lump sum at 60 to pay the mortgage off early.

The initial part of that makes sense but why pay the mortgage off early when it's so cheap? You can probably get safe investments that would pay more than the interest cost so it's better to keep it until its normal end.

Be sure that you track the £40,000 annual pension contribution allowance including any carry-forward you end up using to go above that.

PeacefulWaters

Parking_Trouble wrote: »

My employer only adds 5% to my AVC but still very good compared to putting the net income into alternative investment.

Got a (currently) profitable SAYE to run for another 18 months. Just started another but might cancel and put into AVC.

If you can exercise the option on the Sharesave on retirement and the current share price is favourable I'd stick with it.

If you're still employed on maturity you could pile it all into the AVC for the tax relief and 5% kicker and then retire.

Assuming you're employed by Mrs PW's employer make sure you're banging at least £30pcm into the matching shares thing. Free money with tax relief.

robin61

Parking_Trouble wrote: »

I have three and half years to go until 60 and drawing a DB pension with no actuarial reduction.

I have six years seven months of mortgage repayments to go. Staff mortgage - only £30 per month interest.

Considering working beyond 60. A year or two of drawing pension and salary is tempting.

Feels like I should now be putting as much as I can into AVC's to get maximum tax efficiency.

Also, if I can change my mortgage to interest only I could use the freed up cash to pay into AVC's. Then take that back out in the tax free lump sum at 60 to pay the mortgage off early.

Also I could liquidate some shares and use annual cash bonuses to free up funds to live off to maximise AVC's. I would need to hang on to some savings for emergencies/holidays, etc.

Is putting as much as possible into AVC's the right thing to do? I could take early retirement at any time to free up the funds if I really had to.

Similar strategy to me. I paid my mortgage off age 50 and have been putting as much as I can afford into the company AVC. At the moment I am making sure I don't pay any 40% tax and I am saving on NI as well plus I would have lost my child benefit as well so for me it has been an outstanding investment with no risk. When I do take my pension I will be able to use the AVC to fund the maximum possible tax free lump sum without reducing my pension.
I actually wish I had put more in during the first couple of years because the fly in the ointment is that the generous tax relief could change with the next government although I am hoping it would take a while to make the changes so I am definitely making the most of it while it is still there even if it means the occasional dip into my cash savings.

Parking_Trouble

jamesd wrote: »

Making more pension contributions seems sensible. You can also do things like using money transfer credit card deals or 0% for purchase credit cards and balance transfers to obtain extra money for three or more years to further increase the amount you can invest, knowing that the pension money will be available if for some reason you can't just get more cheap credit to refinance the deals as desirable before you retire.


There are some AVCs that have extremely restrictive policies, like requiring the purchase of an annuity. Be sure that you know what yours allows so you don't get trapped like that. Best deal tends to be using AVC to take 25% lump sum from the whole pension pot so the main part isn't reduced to provide lump sum.

The 0% credit card is something I need to look into. Hadn't thought of it before.

AVC policy is fine. I can take it all out in cash first before impacting pension.

Parking_Trouble

jamesd wrote: »

The initial part of that makes sense but why pay the mortgage off early when it's so cheap? You can probably get safe investments that would pay more than the interest cost so it's better to keep it until its normal end.

Be sure that you track the £40,000 annual pension contribution allowance including any carry-forward you end up using to go above that.

Saves me £800 pcm in outgoings. By going down the AVC route I can pay off the capital 3 years quicker.

I need 3.5 years of not paying capital to build up enough through AVC contributions to pay it off early.

If I revert to repayment I would have to make double the repayments to pay off within current schedule. When I stop work it reverts to customer rate. Therefore feels right to pay it off when I am 60. I will have a lot more disposal income with no mortgage and paid pension and salary (for a year or two).