AVCs versus APCs

kbird

Hi

I'm in the Local Government Pension Scheme and would love to retire asap! However, I'm 59 and my pension age is aligned to the State Pension age so 66 in my case. I had a career break and worked part time when my kids were young so my pension isn't that great.

My question is, is it best for me to buy additional years ( APCs) or AVCs with Prudential? I have about £1000 per month to invest

Thanks in advance

Kathy

xylophone

Have you tried this ?

https://www.yourpension.org.uk/LPFA/LGPS-2014/Can-I-pay-more-to-increase-my-benefits.aspx

Would you feel more comfortable with the certainty of APCs?

jamesd

If you want to retire before age 66 you'll need to pay into something that makes the money available before you're 66. I assume that the LGPS doesn't do that unless you take an actuarial reduction for taking it early. So neither APCs nor AVCs would be suitable if that is your wish.

All standard personal pensions are available from age 55 so any of them would be suitable if your interest is retiring before age 66.

atush

I agree, if you want to go early then a DC pension seems best, and if you did both then AVCs if yours was open before the rule change and you can take your TFLS from that pot.

No point in APCs if they will suffer from actuarial reduction.

LHW99

On the other hand, if your pension won't be enough to allow early retirement even with a couple of years extra savings into a DC pension, then added years may be better, as the extra pension would get index linking.
Perhaps you need to start by getting your state pension forcast, and working out what you would require in income if you retired a few years before SPA. You would then be able to see what the gap is.

hyubh

kbird wrote: »

My question is, is it best for me to buy additional years ( APCs) or AVCs with Prudential?

As others have suggested, the downer with an APC from your POV is that it would suffer an actuarial reduction if taken before your normal pension age in the scheme. On the other hand, at least you'd know what you would be getting - aside from being additional DB benefits, the value isn't linked to pensionable pay at all; moreover, the early retirement factors will just be the ones used for your main benefits (http://lgps2014.org/content/actuarial-reduction).

Nevertheless, if you really are looking to retire soon, then an AVC might not be optimal either given Prudential may apply a small early exit charge, albeit smaller than the DB reductions (https://shropshirecountypensionfund.co.uk/?p=2072). If that's an issue then a personal pension or an ISA done completely separately would likely be better.

kbird

Thank you all for taking the time to reply.

Jamesd - I hadn't thought about paying into something else to take early. The LGPS deducts about 5% per year before the normal pension age. I'll look into a standard personal pension.
atush - I don't understand all of your abbreviations I'm afraid.

jamesd

You can also borrow more cheaply than 5% per year. Say you were inclined to retire four years before normal retirement age, that'd be a 20% reduction for life. You could do something like getting an equity release mortgage at around 5-6% plus fee that allows drawing as desired. Then you can repay that with some of the higher income you end up with by not taking the 20% for life cut.

It's not quite a rule but never taking before NRA is usually right, for those who can borrow at decent rates instead. Almost always hurts less than taking the lifetime drop in income.

If required, using borrowing to defer the state pension for at least five or so years is also likely to be a good move for those in normal good health. 5.8% inflation-linked increase for life, again higher than the mortgage cost.

kbird

Do you mean actually finishing work but not drawing the pension? Obviously, I can't pay into my pension if I'm not working so would I defer it? Soory, if I sound thick!

atush

kbird wrote: »

Thank you all for taking the time to reply.

Jamesd - I hadn't thought about paying into something else to take early. The LGPS deducts about 5% per year before the normal pension age. I'll look into a standard personal pension.
atush - I don't understand all of your abbreviations I'm afraid.

Well you used apc and avc so I guess you know those?

TFLS is tax free lump sum also known as commencement lump sum and DC which is a defined contribution/money purchase pension ie not a Db/defined benefit/Final salary type like yours?

AS a side note, we used to have a sticky about all the abbreviations which the mods in their non wisdom have hidden in t he general sticky for more than a year. Truly a big pain if those like you who need it can't find it.

xylophone

Obtain a new state pension statement to help with planning.

https://www.gov.uk/state-pension-statement

See https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

For example a basic rate tax payer wanting to make a pension contribution of £12000 would make a contribution of £9600 to a Relief at Source scheme and receive tax relief of £2400 -so the £1000 a month you wish to save could be split between pension and ISA.



You might consider contributing to a personal pension/SIPP for a few years - you might then retire say at 63/64, drawing down to give you an income up to scheme/state pension age?

I think that James was suggesting borrowing against your property to give you a lump sum which would enable you to retire, then repaying the loan once you started receiving scheme/state pension.