Understanding AVCs help

Onemanandtwolittleladies

Hi all

Could anyone please help advise me on the benefits of AVCs as I think I’m missing something.

I pay into the LGPS. I wanted to get in the habit of paying AVCs so just last year set up an additional £20 per month.

I’m a standard rate tax payer so under stand it costs me £16 per month.

On checking my AVC through Prudential, it says on retirement I can expect an additional £207. I worked out it will have cost me £5696 in AVC payments (£16 x 356 months). At £207 per year it would take me 27 years (94 yrs old) before I broke even.

Are my suns correct? Is it all just relying on large growth?

Thanks in advance to anyone who reads.

Dazed_and_confused

Over 34 years if you were paying basic rate tax on it all.

Moonwolf

That sounds like an annuity quote. Annuity rates are low so annual pensions could be poor and of course they could grow by more or less than predicted.

If you are in a Defined Benefit scheme the advantage of an AVC is that it provides a flexible defined contribution pot that using current pension freedoms you can take a 25% lump sum then draw down for extra spending when you need it. You don't have to take an annuity.

The money you have saved is before tax so you make tax savings, this is effectively free money added to your savings.

Alternatives are

- Check if your scheme allows you to buy extra pension in other ways. These are usually generous but inflexible.
- Save into an ISA, you don't get the tax benefits but the savings can be used more flexibly and growth isn't taxed.
- Just save, with the current allowance of £1000 of interest on top of your personal allowance, small cash ISAs might not be the best place for your money.

Spreadsheet_Addict

On checking my AVC through Prudential, it says on retirement I can expect an additional £207. I worked out it will have cost me £5696 in AVC payments (£16 x 356 months). At £207 per year it would take me 27 years (94 yrs old) before I broke even.

The £207 is what your current invested amount would buy if you bought an annuity. What you will actually get is a lump sum (which will probably be 100% tax free unless you pay a lot more into it) equal to all of your payments, plus the 20% tax you would have paid, plus any growth on your investment, so that's £20 for however many months you have left to work (£16 in your pay packet) plus growth. You don't have to buy an annuity, especially when you have far better options via extra pension or just investing the money in an ISA.

I've been paying into the PRU LGPS AVC for about 2 1/2 years so far and have been upping my payments as little debts drop off. When the mortgage goes I will be maxing it out (within the annual allowance.) It's also shown 7% growth over that time over the initial gross amount invested.

There's always a risk with anything invested, but you'd have to lose a lot to lose the 25% extra you've got just from not paying tax on your contributions.

Have a look on the "your investments" bit of the Pru site. That's how much your lump sum would be if you paid no more in (apart from management fees and growth, which usually would net out at a higher amount.)

When you take it, you can either take the lump sum as many do (which for LGPS is usually completely tax free,) or buy additional pension in LGPS, either of which will be better than the crappy 200 quid annuity projection on your AVC account. My view is it is far better to keep paying in because the tax free bit makes it better than investing in any other pension product, ISA etc. It's basically free money and there's no other way to grow your investment by this amount that I've found. Most other pensions are tax free going in and taxable going out and unless you have a massive amount in it, yours will be tax free going in and tax free when you draw it.

SonOf

On checking my AVC through Prudential, it says on retirement I can expect an additional £207. I worked out it will have cost me £5696 in AVC payments (£16 x 356 months). At £207 per year it would take me 27 years (94 yrs old) before I broke even.

Are my suns correct? Is it all just relying on large growth?

Statement projections are pessimistic.

They also show the figures in todays spending power and not the actual monetary amount. So, that £207 isnt actually £207 in money but the equivalent of £207 today.

It is also based on an annuity using one of the lowest annuity rates you can get and the growth figures are totally synthetic.

I worked out it will have cost me £5696 in AVC payments (£16 x 356 months).

Now deduct 2.5% per annum for inflation and that is effectively how your projection is working.

Albermarle

As said the projected annual pension figure is calculated on pessimistic assumptions ( an over reaction to the past when over optimistic assumptions tended to be made )
However it has to be said that in pension terms , contributing a very small amount each month ( £20) , is always going to produce a very small pension ...

Durban

I would ignore that part of it.

The main reason most people pay AVC's when they belong to the LGPS is the ability to take the WHOLE pot as a lump sum when you retire. This is done by adding the value of your LGPS plus the AVC's and taking the 25 percent lump sum as your whole AVC pot.

The value of the LGPS and the AVC are added together and you can take 25% of the total.

Say now on retirement your LGPS pension was £ 10,000 per year. The value of your pot would be £200,000. The value of the LGPS pot is worked out by the amount -£ 10,000 x 20. Now lets say that you had saved up another£ 50,000 in AVC's. With a normal pension , you would only be able to take 25% of this as a tax free lump sum.

With the AVC's , you can take the whole £50,000 tax free.

I personally have been paying into them for 5 years and hope to be able to take a lump sum of £100,000 when I retire as well as my normal LGPS pension

Onemanandtwolittleladies

Thanks everyone for taking the time to reply. Much clearer.

djjd70

Just to piggyback on the end of this discussion - I've been looking at Pru AVCs and think they're a bit on the expensive side. What does everyone else think? I've just set up a stocks and shares ISA with Vanguard that is a lot cheaper in management fees.

Is there any benefit in paying into AVCs too?

cloud_dog

Words... apples... oranges, springs to mind.

We need the precise details around charges for your scheme to be able to compare.

SonOf

I've been looking at Pru AVCs and think they're a bit on the expensive side.

AVCs can look dated compared to modern options. Once they were the cheap option but not any more.

What does everyone else think?

Does it really matter what others think? You can get a lot worse than Pru. You can get better. It is a middle of the road option just what an in-house AVC should be.

I've just set up a stocks and shares ISA with Vanguard that is a lot cheaper in management fees.

Not really comparing like for like though.

Is there any benefit in paying into AVCs too?

Sometimes there is. Sometimes you are better in alternatives (like PPP, SIPP, SHP or LISA).