Final Salary Pension - is it worth paying into AVCs?

RJDidier

Hi,

Looking for some advice, having read something interesting in another thread...

I am 25, and have been paying into a large public sector final salary scheme for the last 5 years or so. Over the past couple of years, I have also paid some of my salary into AVCs. I am not a higher-band tax payer (although possibly will be within a year or two).

Previously I had thought paying into AVCs was a bit of a no-brainer (if affordable), due to tax relief, but in the "should I worry about a pension" thread, someone had posted the following:

"All pension contributions are tax efficient as you get tax relief no matter how it's paid. In some cases an AVC can be less tax efficient than a PP or SIPP if your normal contribution takes you below the personal allowance.

Some AVC schems allow you to take your tax free lump sum from the AVC pot and keep valuable index linked pension. This is good but otherwise AVCs are pretty much redundant nowadays and you would be better using a PP or SIPP which could be taken earlier and avoid reducing the main DB scheme"

What exactly does that mean?
How would the AVC reduce the main DB scheme?
What question do I need to ask, to determine if that's the case with my pension?
If yes, why would a PP or SIPP be more efficient?
If no (e.g "Some AVC schems allow you to take your tax free lump sum from the AVC pot and keep valuable index linked pension"), is it best to continue with AVC?

Many thanks for any help!

RJ

jem16

RJDidier wrote: »

I am 25, and have been paying into a large public sector final salary scheme for the last 5 years or so. Over the past couple of years, I have also paid some of my salary into AVCs. I am not a higher-band tax payer (although possibly will be within a year or two).

Which Public Sector scheme is it?

Previously I had thought paying into AVCs was a bit of a no-brainer (if affordable), due to tax relief, but in the "should I worry about a pension" thread, someone had posted the following:

"All pension contributions are tax efficient as you get tax relief no matter how it's paid. In some cases an AVC can be less tax efficient than a PP or SIPP if your normal contribution takes you below the personal allowance.

Some AVC schems allow you to take your tax free lump sum from the AVC pot and keep valuable index linked pension. This is good but otherwise AVCs are pretty much redundant nowadays and you would be better using a PP or SIPP which could be taken earlier and avoid reducing the main DB scheme"

What exactly does that mean?

Ok - so I wrote that.

How would the AVC reduce the main DB scheme?

It doesn't reduce the main DB scheme. What I wrote was that using a PP/SIPP could avoid reducing your main DB pension if you wanted to retire earlier than your DB's normal retirement date.

With a DB scheme, if you take it earlier than the normal retirement date you will have an actuarial reduction of approximately 5%pa. With some AVCs you cannot take the AVC pot without taking the main DB scheme.

With a PP/SIPP you could choose to retire earlier and live off the proceeds from that for a few years. This would avoid taking the main DB scheme early.

What question do I need to ask, to determine if that's the case with my pension?

It's not likely to as I have explained.

If yes, why would a PP or SIPP be more efficient?

As above.

If no (e.g "Some AVC schems allow you to take your tax free lump sum from the AVC pot and keep valuable index linked pension"), is it best to continue with AVC?

Many thanks for any help!

RJ

Does your AVC scheme allow this?

RJDidier

It's the TfL scheme..

RJDidier

That's really helpful, thanks. So I need to find out whether it's possible to take my AVC pot without taking my main pension? If yes, carry on...If no, I might want to look into an alternative vehicle?

PeacefulWaters

RJDidier wrote: »

That's really helpful, thanks. So I need to find out whether it's possible to take my AVC pot without taking my main pension? If yes, carry on...If no, I might want to look into an alternative vehicle?

That's pretty much what I was going to post when I saw the question.

Also, you might benefit from sticking current contributions into a savings account, wait until you're a 40% taxpayer and then contribute.

kidmugsy

PeacefulWaters wrote: »

Also, you might benefit from sticking current contributions into a savings account, wait until you're a 40% taxpayer and then contribute.

Strongly agreed. (Unless you can do the AVC contributions by salary sacrifice). The other thing you could do is wait for the election manifestos, and see how many, and which, parties have adopted the policy of scrapping 20%/40% tax relief, replacing it by a 30% relief. If the latter looks to be on the horizon, you might as well wait for it. On the other hand, all that is up in the air until May at the earliest. And who knows what a UKIP/SNP coalition government might do?

tigerspill

RJDidier wrote: »

That's really helpful, thanks. So I need to find out whether it's possible to take my AVC pot without taking my main pension? If yes, carry on...If no, I might want to look into an alternative vehicle?

Funny - I have been trying to sort this out and was actually in contact with my company's pension dept. earlier today.
This to me was one of the most important.
In my company, AVCs are a completely separate DC pension from my main DB pension. My initial thoughts are load up on AVCs (or possibly SIPP) as much as possible and collect this tax free at 55. Then coolant my main DB pension at 60. They confirmed I could so this. If I can get my AVC/SIPP to 25% of my total pension value I can get it all tax free.

Correct me if I am wrong - the advantage of a company AVC (assuming it is collected vis salary sacrifice) is that you save the National Insurance as well as the Tax??

The Disadvantage of my AVC scheme is the very restricted funds to invest in - there are only four (we can split across any or all of these)

robin61

kidmugsy wrote: »

Strongly agreed. (Unless you can do the AVC contributions by salary sacrifice). The other thing you could do is wait for the election manifestos, and see how many, and which, parties have adopted the policy of scrapping 20%/40% tax relief, replacing it by a 30% relief. If the latter looks to be on the horizon, you might as well wait for it. On the other hand, all that is up in the air until May at the earliest. And who knows what a UKIP/SNP coalition government might do?

I just hope that if this happens it will take a while to implement as you would have thought that all the changes to payroll systems and pension schemes would take some time to implement. So for those who can get that now it might be worth making the most of the 40% while is still there and then reviewing contribution levels if tax relief is reduced. Also I'm wondering if salary sacrifice schemes would still be available ? I must say that all this uncertainty isn't good. I'm hoping to get another 3 years with the current rules but it looks far from certain.

jem16

RJDidier wrote: »

That's really helpful, thanks. So I need to find out whether it's possible to take my AVC pot without taking my main pension? If yes, carry on...If no, I might want to look into an alternative vehicle?

The website for your pension says you can take the main pension without taking the AVC pot but doesn't really give any info on the other way.

At the moment it's still subject to the current rules in that you can only take 25% as a tax free lump sum. You would need to see what changes, if any, will happen after April when the new rules come in.

jem16

tigerspill wrote: »

In my company, AVCs are a completely separate DC pension from my main DB pension. My initial thoughts are load up on AVCs (or possibly SIPP) as much as possible and collect this tax free at 55. Then coolant my main DB pension at 60. They confirmed I could so this. If I can get my AVC/SIPP to 25% of my total pension value I can get it all tax free.

Only if the AVC scheme allows this. Some will only allow you to take 25% tax-free especially if it's not linked in any way to the main scheme.

Correct me if I am wrong - the advantage of a company AVC (assuming it is collected vis salary sacrifice) is that you save the National Insurance as well as the Tax??

Yes that would be one advantage. The other advantage is that some schemes allow you to take your tax-free lump sum from the AVC pot but most don't.

kidmugsy

robin61 wrote: »

Also I'm wondering if salary sacrifice schemes would still be available ?

I can't see much of a public interest justification for salary sacrifice.