APC vs AVC

HawkE

Is there any difference in tax treatment of Additional Pension Contributions to a LGPS versus the same amount of Additional Voluntary Contributions to a Personal Pension operated by a provider (e.g. an insurance company)?

The amounts would be the same. Just wondering if there is any advantage of one over the other from tax treatment point of view.

Kynthia

They are both forms of pension contribution so are tax free going in. The differences are what you get out and they may be taxed differently depending on your income at the time.

You are likely to be able to get all of the AVC out tax free as long as it doesn't exceed 25% of the value of your total LGPS pension. You will get access to it as a lump sum when you retire so can use it flexibly or leave it to be inherited by anyone.

The APC will be taxed at your income tax rate, which for many will be 20% but depends on your total income each year. However you will get an amount annually for the rest of your life, so could end up being much more or less than the APC. The amount you will get is more certain and is good if you need to increase what you'll be living on. However it can't be inherited by whoever you like.

So the choice is more likely to be based on whether you are trying to increase your guaranteed annual income or want money you can use to repay debt or use while you're healthiest when you retire or want children to possibly inherit.

dunstonh

AVCs are largely obsolete nowadays bar a few caveats.
1 - The employer will pay into the AVC (very rare but does happen)
2 - The AVC can pay the tax free cash instead of the main scheme (not common but always something to check)
3 - The employer covers the whole cost (again not common).

AVCs used to be a very cost-effective product but employers were no longer required to offer AVCs after 2006. So, most either pulled out or their AVC has remained on pre-2006 terms. Since then, retail schemes have become cheaper and more functional and can usually beat the in-house AVC.

The LGPS website on additional contributions doesn't look like it has been updated since 2006 either. It refers to FSAVCs, which were abolished in 2006. And only mentions personal and stakeholder pensions not SIPPs.

APCs are closer to the option of buying additional years. A modern variation as such.

The main difference between the APC, an AVC or a PPP/SHP/SIPP is the maturity method. This can be an influence if you are making extra provision because you want to retire earlier and need to fund the gap. APCs are not suitable for funding that gap. Also, if you are making contributions for tax efficiency purposes (i.e. using the pension for tax efficiency rather than retirement provision), the APC is less likely to be suitable.

HawkE

Kynthia wrote: »

So the choice is more likely to be based on whether you are trying to increase your guaranteed annual income or want money you can use to repay debt or use while you're healthiest when you retire or want children to possibly inherit.

Great, that was exactly what I was trying to get to although my OP stated tax efficiency alone. In reality the considerations mentioned all are relevant.

HawkE

dunstonh wrote: »

AVCs are largely obsolete nowadays bar a few caveats.


APCs are closer to the option of buying additional years. A modern variation as such.

The mean difference between the APC, an AVC or a PPP/SHP/SIPP is the maturity method. This can be an influence if you are making extra provision because you want to retire earlier and need to fund the gap. APCs are not suitable for funding that gap. Also, if you are making contributions for tax efficiency purposes (i.e. using the pension for tax efficiency rather than retirement provision), the APC is less likely to be suitable.

Similarly, this is most helpful. While tax efficiency is a consideration the early accessibility is too.

AlanP_2

HawkE wrote: »

Similarly, this is most helpful. While tax efficiency is a consideration the early accessibility is too.

You are probably aware but just in case:

With an LGPS AVC you can't get early access without transferring to an alternative pension which would lose the "all tax free" status.

AVC has to be taken at same time as main scheme benefits.

If early access to a pension is important then neither APCs or AVCs are likely to be the answer.

Apodemus

Coming late to LGPS membership, I opted for lump-sum APCs to my scheme, mainly to balance guaranteed long-term pension income against more variable returns from investments and cover for “sequence of returns” risks to drawdown. Viewed as an index-linked annuity, the APCs seem good value.

I believe that an additional difference between AVC and APC is in how you handle the tax in the year of doing the contribution. If you pay into an AVC, you will pay the net sum and the scheme will add back the basic-rate tax, whereas for an APC you will pay the gross sum and reclaim the tax relief yourself.

My understanding is that for the LGPS, AVCs still meet dunston’s second criteria above - as long as it doesn’t exceed 25% of the implied value of the LGPS sum, it is a tax-free lump sum at retirement.

Also worth bearing in mind that there are no survivor benefits with the APC, so although it feels like buying “extra years” it is a bit different. In practice, very few people make APCs and your pension department may be thrown into all sorts of confusion when you try to do it!

AlanP_2

In my experience very few make AVC contributions either. One LA I am aware of 2 people out of ~600 headcount paying in to the AVC.

Silvertabby

Of those who do contribute extra, more go for in-house AVCs rather than APCs. I would say that there are three main reasons for that:

1. APCs seem expensive, because the fund member is required to pay the equivalent of both employee and employer contributions.

2. APCs may be reduced for early payment if taken before NRA.

3. AVCs can be taken as tax free cash (within the overall 25% limit).

Plu2370

When I set up an AVP it was clear it wasn’t a common request, took months to sort out in the end. Don’t forget if you want to pay AVP for more than 12 months you’ll need to provide a medical report from your GP.

Interested in the comment about needing to claim tax relief on AVP. I thought it came out before tax, should I be reclaiming tax?

dunstonh

It is pretty much the same across all companies. People are more likely to pick individual PPPs or SIPPs than use the AVC.