Is my added years AVC good value?

bitsandpieces

bitsandpieces wrote: »

Sadly, because of reforms to the scheme, the £190p.a. is based on my 2016 salary (with additional increases to keep up with RPI). If my salary does rise above RPI in coming years, the added years bought through the AVC won't be worth any more, although another part of my pension will be.

Thanks for the advice on this thread. I stopped most of the added years AVC and have overpaid my mortgage quite a bit. I still have a small added years AVC left but I've recently been promoted, meaning my salary will be rising above CPI. This is a nice problem to have, but makes the added years AVC worse value - the cost of the added years AVC will rise by ~15% but the benefits will just continue rising at CPI (but capped).


I'm guessing it would now make sense to just cancel the rest of the added years AVC? In terms of what to do with the money I was using for the added years AVC, I could just divert this into the definited contribution part of USS. Would that be sensible? I'll be getting a pay rise with the promotion, so I won't be needing the extra income for day-to-day living.


I was also thinking of putting some of my payrise (and the spare cash I have now my student loan is paid off) aside before I get used to spending it! Would using some of this as added pension contributions (to the Defined Contribution part of USS) be sensible? I've now got quite a small mortgage, so not particularly focussed on overpaying this further.



Sorry - hope the above doesn't sound smug. I've been weirdly lucky in paying off my student loan and getting promoted at around the same time...so figured it would make sense to put money aside for longer-term stuff before something changes :eek:

swindiff

I am in the USS and have been paying into the Retirement Income Builder (DC part of the scheme) since they introduced the match in 2016, subsequently taken away

In that time total contributions to the scheme by myself and employer come to £19,048.36
Its current value is £20,390.77, not a staggering increase you may think but an overall increase of just over 7%.

However, the good bit is that it has only cost me £12,278.05 in reduced takehome pay due to the tax and National Insurance relief thanks to the Salary Sacrifice arrangement with my employer. Therefore the fund is worth £8112.72 more than it has cost me in takehome pay, an increase of over 66%.

But the best bit is that when I come to retire I will be able to get pretty much all of it out tax free, As it is a hybrid scheme the 25% is calculated against the value of the entire pension DB + DC, not just against the cash pot that you have in the DC part of the scheme. It's a no brainer for me to put my money here than anywhere else.

bitsandpieces

Thanks - that's a good point. I neeed to look up the impact of it being a hybrid scheme. Either way, I won't be able to (without big costs) use the funds I put in for a good while - I'm 39 - but could make a big difference in future.

bitsandpieces

I've got a recent payslip, so I now know the exact cost of my added years AVC. Using similar figures to last time, now £7884 buys me an index-linked income of £190 p.a. (plus widow's pension) for the rest of my life after scheme retirement age. The £190p.a. will have been increased by CPI over the past year, but that won't make a big difference...


This is sounding even less compelling compared to just putting the money into a defined benefit AVC. Trying to decide whether to keep an even smaller added years AVC - the smallest I could have through USS would mean putting around £2500p.a. into this, through salary sacrifice - or just put any pension contributions into a defined contribution pot.


One question about accessing the money later on. Once I'm 55, does the fact this is a hybrid scheme mean I could take out 25% of the total value of my pension (DB + DC) from my DC pot tax free, or would this be taxed at whatever my income tax rate is at the time?

bitsandpieces

I've answered my own question about drawing income from my pension before retirement - posting in case it helps anyone else... If I take money out while I'm still working and paying income tax, 25% of what I take will be tax free but the rest will be taxed.


I'll be stopping at least some of my added years AVC (and paying to a defined contribution AVC by salary sacrifice instead, so there shouldn't be any tax implications). Anything else I should bear in mind here?