Avc or personal pension

GreasyPalms

Hi I’m trying to decide whether I’m better off continuing to pay into a personal pension or making AVCs into my workplace scheme. I’m part of a DB scheme and can take my AVC fund tax free after I have taken my normal 3/80th lump sum (as long as it doesn’t exceed 25% of the combined funds). The trouble is the investment options are really poor with the AVC scheme with only 2 equity funds to choose from. Is it normally advisable to go this route even if you’re not happy with the investment options? How can I work out how much tax I’ll even be saving? The AVCs don’t benefit from NI by the way. Thanks in advance!

robin61

I think you are saying that you can boost the value of the pension commencement lump sum using the money in your AVC to fund the larger lump sum up to the maximum 25% of the value of your pension. It also sounds like the money you put into your pension and AVC is done on a salary sacrifice basis i.e what you pay in comes off your gross pay before tax and NI is paid.
If all this above is correct then even as a basic rate taxpayer you are getting 20% tax and 12% NI relief. So 32% in total. And as you are going to use it to increase your PCLS you pay no tax on the way out. That's a very attractive proposition.
What is it that makes you believe the fund choices are poor ?

Paying into a seperate personal pension you will get the tax relief but will miss out on the 12% NI relief and only 25% of the total fund will be tax free. It would still be nice to have once you have maxed out on the AVC and it does give you some nice options like using the DC scheme to retire early and defer your DB scheme thus avoiding some or maybe even all of the actuarial reduction.

My company is going to close my DB scheme down next year and put us in a DC scheme. This means we won't be able to pay into the AVC. I'm very pleased I got enough into the AVC while I still could.

bigadaj

If you plan in retiring at scheme age then the AVC are attractive even if the fund choice isn't great.

A separate sipp or pp would have the advantage of flexibility if you wanted to retire early though.

GreasyPalms

Thanks for the replies!
I’m starting to understand the benefits of AVCs now. Unfortunately I only get tax relief on contributions but will get 40% relief. I do intend to retire early but there is a long way to go as I am still only 33. I intend to take my DB pension at the normal age (now 63 having gone up from 62) and hopefully use a combination of personal pension/sipp, LISA and ISAs to fund early retirement. I will stop contributing to my personal pension and redirect those contributions into AVCs in case my employer goes the same route as yours robin. From what I can work out, I can take a tax free lump sum equal to 25% of (1/80 salary x 16 x years service ) + (3/80 salary x years service lump sum) + AVC fund. I know all schemes differ, but does that sound about right? So I can pretty much estimate how much of an AVC pot is needed to max the tax free lump sum and keep adjusting contributions as I go? When I’ve got the fund choices in front of me I’ll post them up to see what people think is best but I was disappointed with the options really. Still it looks like the way to go! Thanks again it’s a big help!

robin61

I would double check your scheme rules about the AVC if you are not 100% sure how the AVC works. Some schemes like mine and hopefully yours work the way I described. Others are different and the AVC is separate rather than being linked to the main DB scheme and having the option of being used to increase the PCLS.

dunroving

I'd agree that the tax advantages of the MPAVCs probably outweigh the limited choice of investments. What makes them "poor"? Do you mean poor = limited choice, or have you looked at the fund history and their track record is poor? If the funds are something similar to a Vanguard mixed equity moderate risk fund, then the limited choice probably doesn't matter.

GreasyPalms

I only have 2 equity funds to choose from:

Aquila life (50:50) global equity index fund
This is too U.K. heavy for me with it being 50% ftse all share I believe but I think is probably better out of the 2 for me. 0.31% charge

A diversified growth fund which is 50% black rock dc diversified growth fund and 50% invesco global targeted returns fund. I’m a bit confused by this one to be honest. 1.04% charge

In my personal pension i’m 70% fidelity world index, 15% fidelity em index and 15% vanguard small cap index. As I have 30 years until I draw this fund, thats a long time for good/bad returns to compound so I want to be sure I’m not letting the tax tail wag the investment dog! I’ve done some quick projections and if I stay in the scheme for 30 years say, I might be able to take £60,000 tax free if I pay into AVCs. The same pot in a personal pension I’d only get £51,000 but I’m thinking better investments over 30 years will more than make up £9,000 in better returns? Or maybe not? This is the part I’m trying to get my head around!

robin61

Remember that if your AVC is linked to the DB scheme you can use it to fund the PCLS so that means that providing you don't put too much into it you can get your AVC investment out absolutely tax free.
That's not going to happen with a personal pension where only 25% will be tax free.
In terms of the fund performance maybe it would be a good idea to ask an IFA to look at it.
However I'm thinking that at your age maybe you can invest in both ? A DC scheme has the advantage of enabling you to front run your DB scheme in the event of you wanting to retire early. Thus potentially avoiding Actuarial reduction. The AVC would need to be taken when you get your pension if you wanted to fund the PCLS with it. So maybe you can have the best of both worlds ?

greenglide

Remember that if your AVC is linked to the DB scheme you can use it to fund the PCLS

You may be able to use this to fund the PCLS but this is dependent on the pension scheme actually this. It is vital that this is checked with the scheme documentation before a decision is made to pay the AVCs.

It may useful to avoid the situation whereby the value of the AVCs is greater than 25% of the fund value. This isn't particularly hard as the value of the DB is only 20 times the annual pension in this case.

robin61

greenglide wrote: »

You may be able to use this to fund the PCLS but this is dependent on the pension scheme actually this. It is vital that this is checked with the scheme documentation before a decision is made to pay the AVCs.

It may useful to avoid the situation whereby the value of the AVCs is greater than 25% of the fund value. This isn't particularly hard as the value of the DB is only 20 times the annual pension in this case.

Absolutely. You need to check and make sure you understand the scheme rules. Hopefully it's what you think. If so..

Any AVC residual after the 25% has been taken is still yours but there are likely to be some restrictions as to how you can take this depending on your scheme rules and the options for the residual are not going to tax free.
Once you are confident you have reached the 25% point funding the DC scheme will provide some nice options.

Kynthia

Where I worked the pension wasn't salary sacrifice so no NI was saved. Plus you couldn't link the avc to the pension and get more of it tax free. So in that case there was no incentive to use an avc over a private pension.