AVC - should I transfer out

MrStanners

I am in a DB pension with AVC attached to it. I asked our pension admin about the AVC last year and they said I had to buy an annuity with it at the same time that I retired with the DB pension, or I could transfer it into a separate pension.

I estimate I will have 20k in AVC when I plan to retire at 55. I've been trying to work out if I should stick with the AVC or transfer it.

I came up with three scenarios, and also made a couple of assumptions:
1. The money would need to last 30 years (assumed 85yo at death).
2. Any cash I have grows at RPI net of tax, so I can just divide the cash by 30 to calculate an annual income, & it will increase by RPI each year.
I'm a basic rate taxpayer & I think I will be one when I retire (deffo not higher rate).

Scenario 1 (annuity route)

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Take 25% tax free (5k cash = 166pa over 30 years increasing with RPI)
15k annuity (Aviva website 282pa increasing with RPI)
Pay tax at basic rate on annuity 225pa increasing with RPI
Total net 391pa increasing with RPI.

Scenario 2 (transfer to personal pension then get cash)

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Get 25% tax free (5k)
15k taxed at 20% gives 12k
Therefore total 17k cash (over 30 years gives 566 net pa increasing with RPI)

Scenario 3 (transfer to personal pension & leave it to hopefully grow)

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I have some savings so I'm not desperate for the AVC money.
I could just leave it and draw on it a few years later.

By my calculations the AVC annuity scenario is the worst option.

Questions:
Is my logic flawed?
Is there any advantage in the annuity route? I would have to live a lot lot longer to make it worthwhile.
Are there any costs involving transferring from a company AVC to a separate pension?
Do I need to go through an IFA to transfer out of my AVC?
Any suggestions for low cost pension I could transfer to?

kidmugsy

The AVC guarantees index-linking, and the personal pension (or heap of cash) does not. The annuity lasts until death, which could easily be years after age 85.


Why not repeat the sums, using interest rates, annuity rates and inflation rates from the 1970s? You are assuming currently that the next 30 years are going to be much like today. That could be a rash gamble.

If you don't need the money why draw it out of a tax shelter: why not leave it there to grow, or until you do need it?

MrStanners

Point taken about inflation & interest rates.
I have to take an annuity from the AVC when I retire, it's linked to my DB pension & I don't get the option to leave it alone to grow.
Do I need to go through an IFA to transfer it? Since the sum of money is small (for a pension pot) I don't want to pay an IFA unless necessary.

dunstonh

What about open market option on the annuity? That often results in better returns than the in-house annuity.

xylophone

You can take the DB pension without actuarial reduction at 55?

MrStanners

No I can't take my DB pension at 55 without a reduction. It will be reduced, I think it's reduced by 3% a year before 65 (I may be mistaken about the percentage).
I don't understand the point you are making. I never said my DB pension would not be reduced or how that is relevant to the question of the AVCs.

xylophone

If you are going to take a 30% hit on the DB pension when you take it, and don't need income from the AVC , it might be better to transfer it to another pension arrangement?

https://www.gov.uk/new-state-pension/overview

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

MrStanners

ok I understand now.
Yes I am starting to think that I should transfer it to another pension.