Are AVCs worth it late in working-life?

dunroving

As others have said, a lot depends on the conditions attached to whatever you are paying AVCs into but I am (hopefully) within 3+ years of retirement, and am ramping up how much I am bunging into AVCs and a SIPP. The new pension rules make this a no-brainer these days. Why pay £60 off a mortgage now when that can potentially be £80 or £100 in a pension fund you can draw from relatively soon? With a TFLS and possibly lower tax rate on withdrawal, it's a substantial bump in how much you get back.


The Devil is in the details, but in general I'd say it's an easy decision. The only caveat I'd make is (as in my case), if you plan to withdraw within a short time frame, it's critical to remember what direction investments can go in the short term ... it's not that long ago that retirees in DC schemes had to postpone retirement by a few years because their pension pot was all of a sudden down by 20% (or more).

Andy_L

Unless the AVC scheme has some benefits via the associated main scheme (e.g. discount charges, salary sacrifice, preferential lump sum) they offer no realbenefit over a personal pension and often have disadvantages (e.g. have to be taken at the same time as the main pension).
AIUI they are a legacy product from the old days when it was impossible/difficult to have a private pension as well as a company pension

N1AK

peadar wrote: »

I have 25 years' contributions at present, and will have finally paid off our mortgage at the end of this year: is it worth my while at this stage - four years off retirement - making AVCs with what would have been the mortgage payments? Or would I be better with a cash ISA?

AVCs! At the very least use it to get the 40% tax back, then in four years time you can bring the money out of your pension at a lower tax rate. This could be worth thousands of pounds to you over the next few years.

redbuzzard

If you plan to use AVCs to fund the PCLS alongside a DB pension, which is an excellent idea, just make absolutely sure you can do that. I was able to do that with one of my DB pensions, although I had "too much" for the PCLS and had to annuitise £6,000 as I couldn't do a partial transfer of the AVCs.

I am also in a hybrid scheme (DB & a DC section) and by far the best idea for me is to take the DC as PCLS. BUT, as things stand, any PCLS must be taken pro rata from both sections. Worst case is I may be forced to annuitise the DC, though I think this won't happen as it cuts across the intent of the new provisions. The likelihood is that I will have to take a partial transfer of 100% of the DC into my SIPP which will at least enable me to take 25% tax free and do drawdown on the rest. Even a partial transfer is currently at the discretion of the trustee.

hyubh

Andy_L wrote: »

Unless the AVC scheme has some benefits via the associated main scheme (e.g. discount charges, salary sacrifice, preferential lump sum) they offer no realbenefit over a personal pension and often have disadvantages (e.g. have to be taken at the same time as the main pension).

Also the possibility of exit charges given a relatively short timeframe, depending on the scheme and the provider (e.g. the Pru imposed a set on their LGPS customers a few years back, albeit reduced since last autumn).

AlwaysLearnin

Andy_L wrote: »

Unless the AVC scheme has some benefits via the associated main scheme (e.g. discount charges, salary sacrifice, preferential lump sum) they offer no realbenefit over a personal pension and often have disadvantages (e.g. have to be taken at the same time as the main pension).

Another potential advantage is that deduction from salary at source could mean avoiding the self assessment process.

jem16

AlwaysLearnin wrote: »

Another potential advantage is that deduction from salary at source could mean avoiding the self assessment process.

You don't need to do SA just to claim higher rate tax relief. A simple call to HMRC and an adjusted tax code will do the job.

AlwaysLearnin

jem16 wrote: »

You don't need to do SA just to claim higher rate tax relief. A simple call to HMRC and an adjusted tax code will do the job.

Fair enough, but you'd still be 'out of pocket' for a while until you got your rebate (assuming you based your contribution to a PP on the 40% grossed up numbers). Perhaps I should have said "reduced admin".

Not suggesting it's a major factor by any means, just another factor for consideration.

smjxm09

I pumped so much money into my AVC's over the last 2 years that I got my take home pay just below the threshold for national insurance so I save an additional 12%. Any shortfall in spending power was made up from savings.

LXdaddy

Certainly contribute as much as you can to a Pension. Being a higher rate tax payer at the time of depositand a standard rate tax payer at the time of withdrawal is the nearest thing to free money.

I'm approaching the end of working in the next couple of years and have ramped up my AVC contribution rate significantly over the last few years (should have started earlier obviously but these recent contributions are particularly valuable)

Wether to go AVC with your employers scheme or start a SIPP has pros and cons as discussed above. But certainly go the additional Pension route.

Be aware of the Annual Allowance limits on how much you can contribute but unless you are a seriously high earner it will probably not trouble you.