Some help needs LGPS possible AVC

marycanary

Hi
I wonder if you knowledgeable people can help me with my thinking.

I am 55, single and worked in local government from 1987 to 2010. This pension is deferred and will pay about £21k per annum at 60. I left and returned in 2013, this current pension has a small amount of final salary and the rest is CARE. For, the first time in my life I have some money, the children have left home, I earn £60,000 and I have no mortgage or other debt.

I would like to retire at age 60 years, or earlier if I can, so I need to get serious about savings. I'm leaning towards setting up AVC, my scheme is with the Prudential and I hope to save a contribution which costs me £500 per month plus additional tax saving.

I don’t know if this is the right thing to do or what other options I have. Also, I don’t know which of the Prudential funds should I put the money in? I realise 4/5 years is not long to invest. On the other hand, I have a solid base in my pension. I wonder if I should put at least some of the monthly contribution into a medium to high risk fund.

I’ve never been good with money, I’ve always earned and spend so having money is new to me.

Thank you,
Mary

Dansmam

Hi Mary
I’m in much the same position, similarly now child-free/ish and similar figures and dates - want/need to free myself as soon as I can from the total nightmare that is austerity +++ public service so I can have some unstressed retirement time while I can still make something of it - so every possible penny is going into avcs. My plan is to put in my resignation the day I work out I can live on avcs and (eeekh) possibly some 0% credit until the reduction for early receipt leaves me with £21k. That being an income I know I can live on and still do the things I most enjoy. I know a few people who have piled into avcs in their last few years of employment. They have retired now and all look very well on it. I would take the tax advantage and go for it. I was totally shocked (or should that be pleasantly surprised?)at the smaller than expected reduction in the pay packet and larger than expected avc contribution each month. Having left it till far too long after 50 to look seriously at pensions options. I went for a fund that isn’t exclusively uk and isn’t much in property - but that was based on gut instinct not research so others will be able to give much wiser advice on that bit of your question. Good luck with it all ��

Apodemus

Mary, it’s worth also doing the sums on APC (Additional Pension Contributions into the LGPS) for comparison. Each year contributing £500 a month might buy you an extra £500/year or more pension, index-linked for life. Whether this makes sense in your circumstances depends on your life expectancy, attitude to risk, requirements for retiral lump-sum, balance of other investments etc. But it does offer a reasonable rate of return and absolute certainty for future planning.

Spreadsheet_Addict

I'm in a similar position (though not as well paid and only 48) in that I have 21 years worth of NHS pension I can take at 60 and LGPS - 4 years final salary, 4 years CARE to date. I've started an AVC with the Pru, with an intention to increase the contributions dramatically when my kids finish university in 3 years, then spend a year paying in maximum I can manage when my mortgage is paid off in the year from when I'm 54 to 55 (using the previous year's tax allowance.) This will give me £50-60K AVC in total. To this, I can add £30k NHS lump sum.

My plan is to take the NHS pension with the actuarial reduction at 55 (21%) and the LGPS (much larger reductions - 42% for Final Salary and 48% for the CARE bit.)

The cost of the mortgage (it's a very high monthly payment because we aim to pay it off in 6 years) and putting the two kids through uni equates to my take home pay, so we are effectively living on my wife's salary.

My pensions will give me about £17k p,a, after reductions. My wife is a teacher and will keep working full time for another couple of years (paying extra AVCs into her PRU scheme equivalent to my monthly pension income) before going part time and eventually taking her own pension (more like £13k) at 57/58 and spreading her AVC lump sum (£30k ish) - as allowed by the teacher's scheme to avoid hitting the 40% tax bracket. Plus the £10k or so final salary lump sum she gets.

Our combined pensions after tax will equal (actually be slightly be higher than) my wife's take home pay now.

My intention is to use the AVC plus my NHS lump sum to bridge the gap from my retirement to state pension age - paying for new cars, holidays etc, since our combined pension equates to our normal living costs. This will give us the comfortable retirement we need and allow us to enjoy extra holidays etc as well as having an emergency fund.

The reason why I'm going for the AVC and not buying extra years is because the LGPS AVC scheme will all be tax free because it's based on 25% of the nominal LGPS pension pot (roughly 20x the pension you expect to get) plus the value of the AVC pot - effectively allowing me to save up and get 25% for nothing, whereas any extra years bought get no employer contribution and will all be subject to actuarial reduction for early payment at 60. This is something to bear in mind when you are doing your sums - although if you're going at 60, your reduction will be less and you probably have an earlier Normal Pension Age (NPA) than me.

Extra years will all face actuarial reduction from my NPA of 67 and I would rather have a larger sum over a shorter period to close the 12 year gap and allow me to maximise enjoyment of my relatively healthy years left from 55. Once I get my state pension, my disposable cash will be higher than its ever been.

AlanP_2

The LGPS AVC scheme, as pointed out, has the fantatstic advantage over some other AVC schemes in that it can be taken as the tax free PCLS (with limits).

The downside is that it can only be taken this way at the same time as the main scheme benefits so isn't always suitable if early retirement is the goal due to the reduction on main DB/CARE pension.

To minimise the reduction we have cash savings and SIPPs running as well as our LGPS AVCs which gives us the flexibility to stop work, live off those for a while, and then take the LGPS pensions closer to NPA.

Our AVC provider isn't Prudential so can't comment on their fund options but given the relatively short timescale you are looking at, and the fact that you gain a massive uplift "profit" on your contributions from the tax relief at HR I would go low risk / volatility.

If you pay the equivalent of £500 "after tax" into your AVC that will be a Gross Contribution of £833.33 pm. The simplistic view I take is that is an instant "profit" of £333.33 pm = 66.67%.

Assuming that contribution * 36/48/60 months (or whatever your ideal timescale is) gives you a large enough tax free lump sum why chase investment returns that you don't really need? Instead, aim to keep pace with inflation, hopefully get a bit of bonus investment growth and plan those longer holidays?

Silvertabby

The LGPS AVC scheme, as pointed out, has the fantatstic advantage over some other AVC schemes in that it can be taken as the tax free PCLS (with limits). Posted by AlanP

That's the case at the moment, but there were mutterings a couple of years ago about limiting the AVC fund tax free cash to 25%.

It's all crystal ball stuff, but something to bear in mind by someone who isn't due to retire in the next year or so.

OP will, of course, have some standard tax free cash from her pre 2008 service.

Spreadsheet_Addict

Technically it's already limited to 25%. What's important is what it's 25% of. The difference is that for LGPS (it doesn't apply to AVCs on the Teachers' Pension Scheme or NHS Pension where it's just 25% of the AVC pot that's tax free) the figure that the LGPS AVC is based on is 25% of the total nominal LGPS pension pot, PLUS the total AVC pot. If you go over 25% of this, you still pay tax on that, but given usually the total pot is very large, you'd need an awful lot of AVCs to be exceeding 25%.

AlanP_2

Silvertabby wrote: »

That's the case at the moment, but there were mutterings a couple of years ago about limiting the AVC fund tax free cash to 25%.

It's all crystal ball stuff, but something to bear in mind by someone who isn't due to retire in the next year or so.

OP will, of course, have some standard tax free cash from her pre 2008 service.

I've heard those mutterings as well, but am fairly certain that any changes wouldn't be retrospective so any AVC built up prior to new rules could be taken tax free.

The closer you are to retirement the lower the risk of being caught up in any changes is certainly true.

Even if it does change, tax wise, you are no worse off than if you went PP / SIPP.

If that did happen then the downside would be the linking of commencement to the main DB pension start date. Transferring out of the AVC to a SIPP or PP, which can be accessed at a different date would get round that.

marycanary

Hi,

Thank you everyone for your comments and observations. I'll get started in the new year.

Mary

My_perfect_cousin

A few things that may (or may not be of interest).

Do you have a single LGPS pension? Ie did you restart it when you returned?

Rule of 85. It will be worth checking whether this will apply in your case. It is basically the total years of pensionable service plus your age - at the date of retirement (at minimum of age of 60).

As has been said, the main benefit of AVCs occurs when they are taken at the same time as the occupational pension.

Prudential AVCs. Prudential levy charges that apply if you take your benefits within 3 years. The charges reduce within the 3 year period.
They have various funds that can be used. It is possible to switch between AVC funds. As an example, a person could decide to move the balance of their investment from a more riskier fund to one with less risk as retirement draws near etc. The funds carry different levels of risks and different fees.. 'risk' obviously being what it is.

Prudential have a free phone line and also provide workplace presentations etc.

Things of general relevance re AVCs include the annual and lifetime pension contribution, the tax of salary reductions created by large AVCs and NI impact... and finally... stating the obvious... the money invested in AVCs is taken at source meaning that your monthly pay packet will be lower...