LGPS - should I put all my savings in a AVC?

Wentthedaywell?

I will be retiring probably at 60-62 in 2 - 4 years and want a last ditch savings push.

I have 34 years in the LGPS and will get a lump sum of about £40k.

I am just about to set up a S&S ISA and have about £50k cash. I've got a AVC, opened last year (under the old system where I can take 100% as cash) and currently pay £750 gross p.m. This is a SL 50:50 split between Balanced Lifestyle and a with-profits (I don’t know if this is a good mix, but was in a rush to get in before April).

I want to save another £300-400 pm.

What are people’s views about what to do with this? Put it in S&S ISA or more in my AVC? The latter seems more attractive with the tax break, but am I putting my eggs in one basket should things change and I can’t take all as cash or there's a crash? Is it better to wait until after the election and see where the land lies? And any views about my AVC funds? Thanks.

Dunnit

You only receive tax relief on the tax you would notionally have paid. So the maximum you should pay in is the amount that reduces your income tax to £0. The rest could go into a PP where the tax relief could be reclaimed by the pension company and you could claim 25%tf in retirement.

As the AVC has a 20% uplift then you have a good chance of coming out in front so, depending on your risk appetite, appears reasonable.

Wentthedaywell?

Thanks Dunnit. I won't be able to save more than my tax and yes, the 20% return is great even if it doesn't make anything else.

I don't have any risk appetite really as I will be retiring in 2-4 years. I am thinking of changing my with-profits element into the balanced lifestyle fund. The charges on the with-profits are higher for a lower return, and the Lifestyle fund moves to safer investments as retirement approaches.

What do people think of getting rid of the with profits? And sinking all my future savings into an AVC?

Dunnit

If your risk appetite is nil then the 20% pension uplift is likely to beat inflation and any safe cash savings, over the next 2-4 years. So the normal risk of cash - losing out to inflation - is not applicable. Minimising risk would move your with profits to cash as well.
Your Lifestyle fund will mainly be in cash as well.
What are you intending to do with all the cash?

atush

If the AVC is the old type, that you can use to fund your lump sum and not reduce your valuable LGPS pension, then yes I'd whack in as much as you can.

Triumph13

I'd double check that lifestyle option just to make sure that it is one that moves everything to the cash fund. An awful lot of lifestyle options out there move to 75% UK gilts on the assumption that you will want to but an annuity.


The big piece of the picture we are missing is what do you plan to do with the money once you do retire? If it earmarked to clear a mortgage or other debt or for a specific purchase, then cash within the AVC sounds like the most sensible thing to do. On the other hand, if you plan to invest it in a S&S ISA to generate additional income through your retirement, then the most sensible thing is probably to have much the same investment mix in the AVC as you intend to have once it's in the ISA.

Wentthedaywell?

Thanks all, I do appreciate this. I shall check about the gilts/cash. Three more questions if I may?

1) why would I not be able to take cash, rather than an annuity, if the money has been invested in gilts?

The money is intended as my medium/long term capital pot. I should have enough defined benefit pension to live on modestly, so this pot will fund the holidays,new car etc. I don't care about leaving any bequests.

2) I don't understand Triumph's suggestion about the AVC investment mix being similar to the ISA. I have to take the AVC as cash (or an annuity which I don't want), when I retire (hence I don't want to gamble with it). So why should the AVC mix now be the same as a future ISA?

3) Do you think maxing out my savings in an AVC is safe before an election in case there are retrospective changes to being able to take all as cash/tax changes etc?

Thanks again for your responses.

atush

I would think, that you no longer have to buy an annuity but can transfer the AVC pot to a pension that allows you to drawdown what you like when you like?

but the best thing to use the AVC for, is to provide the up to 25% tax free lump sum from your lgps pension. Rather than taking lump sum from the lgps pension and reducing it?

AlanP_2

Wentthedaywell? wrote: »

Thanks all, I do appreciate this. I shall check about the gilts/cash. Three more questions if I may?

1) why would I not be able to take cash, rather than an annuity, if the money has been invested in gilts?

You will be able to take it as cash. I think the point being made is that if you transfer to CASH in the LS fund then all you need worry about is inflation and you would expect the 20% uplift to cover that.

If it transfers across Gilts there is a risk that the value could still fall over the time period. Expectation is that Gilts will fall in value as and when interest rates start to rise so you have a possible risk there.

Wentthedaywell? wrote: »

The money is intended as my medium/long term capital pot. I should have enough defined benefit pension to live on modestly, so this pot will fund the holidays,new car etc. I don't care about leaving any bequests.[

2) I don't understand Triumph's suggestion about the AVC investment mix being similar to the ISA. I have to take the AVC as cash (or an annuity which I don't want), when I retire (hence I don't want to gamble with it). So why should the AVC mix now be the same as a future ISA?/QUOTE]

If, post-retirement, you plan on putting your cash lump sum into a Stocks & Shares investment (ISA probably) so that over the rest of your life you are getting returns that have TYPICALLY beaten inflation (admittedly with a risk that the investment is down in value just as you want to sell some and pay for that holiday) then you would probably be better off going for a non-cash investment now to start building a potentially larger pot.

Retirement time - sell pension investments, take cash and rebuy inside an ISA.

3) Do you think maxing out my savings in an AVC is safe before an election in case there are retrospective changes to being able to take all as cash/tax changes etc?

Thanks again for your responses.

PERSONAL OPINION (as all these are), but on this definitely:

I can't believe any UK Government will make a retrospective change BUT if they make a rule change then that is just the way it is I'm afraid but USUALLY they make special arrangements for existing schemes, particularly if you are near retirement and have little time to think of a Plan-B.

Apologies to the other posters if i have misunderstood what they were referring to.


Last point, my wife and I are a bit younger and also in LGPS. My wife opened an AVC just before the change last April and we are loading it up as fast as we can.

Wentthedaywell?

atush wrote: »

I would think, that you no longer have to buy an annuity but can transfer the AVC pot to a pension that allows you to drawdown what you like when you like?

but the best thing to use the AVC for, is to provide the up to 25% tax free lump sum from your lgps pension. Rather than taking lump sum from the lgps pension and reducing it?

I haven't thought what to do when I get it - I was expecting take it as cash as put it in a S&S ISA. I haven't thought of drawdown. Is this better than cash at the time of retirement?

I still have a ring-fenced LGPS lump sum and wasn't planning to commute any more, so the AVC is for extra cash. I opened it March 2014 so I understand I can take it all as cash.

Thanks ALANP for your explanation about gilts.

My funds are a Multi asset 20-60 shares, Managed (which has just moved into less risky investments now, but mostly govt bonds) and a with-profits. I am thinking of moving the whole lot into the Managed funds which gets steadily more cautious as retirement approaches, but I shall think about cash too. Does this sound sensible?

Thank you all - any more comments gratefully received. It seems such a lot to take in late in the process. I do wish I'd done this years ago, but better late than never I suppose.

Triumph13

Wentthedaywell? wrote: »

1) why would I not be able to take cash, rather than an annuity, if the money has been invested in gilts? .

You can always take it in cash, but if it's been put into gilts then it's value will move up and down with gilt prices - so it's only a method of reducing risk if what you want to BUY with it moves up and down with gilt prices ie either gilts themselves or an annuity.

Wentthedaywell? wrote: »

The money is intended as my medium/long term capital pot. I should have enough defined benefit pension to live on modestly, so this pot will fund the holidays,new car etc. I don't care about leaving any bequests.

2) I don't understand Triumph's suggestion about the AVC investment mix being similar to the ISA. I have to take the AVC as cash (or an annuity which I don't want), when I retire (hence I don't want to gamble with it). So why should the AVC mix now be the same as a future ISA?

If you want to use the money over 30 plus years of retirement then you possibly don't want to hold it in cash or else it will be eaten away by inflation. You might well want some kind of mix of investments that fit your risk apetite. This could include equities, bonds, cash, REITs etc and the logical place to keep this (eventually) is in an ISA. These investments all go up and down in different ways. If you plan to use the AVC fund, once cashed out, to purchase a particular mix of assets then you want the fund to be in that same mix beforehand to minimise your risk.


As a random example, suppose you wanted to end up with 25% cash, 50% bonds and 25% equities (eg for your short, medium and long term spending). You put your AVC into that mix as you approach retirement then at retirement the fund sells those assets, you take the cash as your lump sum and use it to buy much the same assets back again outside the pension.


This asset mix means the value of your AVC fund will be much more volatile than if you were 100% cash in there, but the important thing is that it moves up and down in the same way as what you plan to buy with it does and therefore minimises your risk.