LGPS AVP or AVC?

Swipe

I'm considering topping up my LGPS pension but I can't make my mind up whether to go with APC or AVC. I am 50 years old and was thinking about paying monthly to achieve the maximum amount of £7149 extra annual pension. That would be possible if I paid in £600 a month for the next 16 years. To be honest, I can't see myself still working in my local government job until I'm much past 60, albeit through redundancy or by choice. I've read APCs are not good if you wish to retire early but I take it that only refers to drawing your pension early? I am prepared to wait until I'm 67 before drawing it, even if I retired early. I am single so death benefits are of no concern.

On the other hand, I'm wondering if I'd be better off with the Standard Life or Scottish Widows GAVC route instead but wonder if the charges are high. Would I be much worse off by not getting the salary sacrifice NI relief and just paying into a low cost Vanguard SIPP that I can manage myself like I do with my stocks and shares ISA?

Silvertabby

APCs (and your main scheme benefits)  won't be reduced for early payment if you retire but then defer payment until NRA.
However, you won't be able to carry on paying into your APC contract once you leave - so if you want the maximum £7149 you'll have to up your monthly payments.

Swipe

Thanks, so to confirm, if I pay the max over 10 years instead and then stop working when I'm 60, as long as I don't draw my pension before my NRA, that £7149 is guaranteed on top of what my pension would be worth up to the leaving date?

Silvertabby

Yes. .....

daveyjp

If AVC is salary sacrifice eligible the extra pension contribution from the NI savings can't be dismissed, especially at £600 a month contribution level.

Silvertabby

The advantage of in-house AVCs is that you have the choice of taking them as tax free cash (within HMRC limits) or using them to buy extra LGPS benefits (not the same as APCs).

sg1000

I went the AVC route with Prudential.  Although not salary sacrifice, I figured the tax savings made it worth it.  At retirement, I have the choice of taking the AVC as a lump sum (I've checked this would not be more than 25% of the total "pot"), or I can buy increased pension...so there are options.

whisper_quietly

I’d go with the AVC.  Tax savings are the same as the APC but they give you the option of a lump sum or annuity. APC buy only added pension. You can’t use the AVC to buy additional LGPS pension as far as I’m aware. Any pension coming from the AVC has to be via an annuity.
The AVC lump sum is paid tax free under current regulations and removes the need to buy additional LGPS lump sum from your LGPS final pension. Also remember that your LGPS pension will be reduced (as will the APC pension) if you retire before NPA. So will your LGPS lump sum, which is often overlooked. Also if you have dependents then unlike the LGPS no extra pension benefits will be paid in respect of the extra APC pension you buy. The APC buys extra pension for only you so presumably all your contributions are lost if you don’t live long enough to draw them. 

You are going to pay £7.2k annually for 17 years to gain the additional pension you’ve quoted. £122k in total less either the 20/40% tax deduction. Get out the spreadsheet and do the maths re rate of return against potential AVC growth. 
Having retired earlier this year at age 58 (as a 40%er) it’s clear that in my circumstances the AVC provided a better outcome (both in growth & supplementing the LGPS lump sum) than investing in an APC.  I don’t have a crystal ball but I’d imagine the public sector may be burdened with further cuts over the next few years due to the financial cost of Covid. You need to consider this in your decision. Good luck! 

Silvertabby

whisper_quietly said:

I’d go with the AVC.  Tax savings are the same as the APC but they give you the option of a lump sum or annuity. APC buy only added pension. You can’t use the AVC to buy additional LGPS pension as far as I’m aware. Any pension coming from the AVC has to be via an annuity.

Yes, it's called an annuity, but it's purchased through the LGPS and added to the main benefits.  The rates are much more generous than any open market annuity I'm aware of.

Swipe

OK, I was mistaken, it isn't salary sacrifice so no reduction on NI, just the bog standard deduction for tax. I've asked for info regarding the annual charges on the lifestyle portfolio plans that my employer has agreed with both providers, but from what I'd seen the charges are roughly 1 - 1.2% unless they've agreed some kind of discount. I was thinking about going down the low cost SIPP Vanguard route with 0.39% charges which was looking attractive as I can easily increase or top up my contributions but they don't offer flexi draw down at the moment. That would have been my preferred option if I could just leave it invested and then draw down as required.

Swipe

If I open a SIPP I would be looking to pay in a lump sum in addition to monthly contributions, so will have to take into account my existing defined benefit contributions (employee and employer) and deduct them accordingly from my annual allowance. As my DB contributions are taken pre-tax, would I deduct the amount from my allowance as shown on my payslip or do i add another 20% on top? I'm a basic rate tax payer.