Pay into partners DC pension or my LGPS AVC

itsmecathy

Hello all, 
Partner and I (not married) are both 51. I am long term member of Scottish LGPS scheme, part time earning £28800. He is also part time earning approx £17500 and has  only been paying into SHPS DC scheme for 18 months auto enrolled, he and employer pay in 3%. We have 2 kids, aged 14 and 17, both thinking of Uni. Mortgage due to end 2028, currently overpaying so end date likely to be 2026.

We have never earnt loads so calculate we would be happy in retirement on £24000 for us both. Both on target for full SP. I'd like to retire at 61, and my LGPS pension, reduced for taking early will be £12750 with LP sum of 13000. I think I'd be ok living off this till State pension kicks in at 67.

Partner would also like to retire at 61 ISH so the issue is how best to fund this as his pension currently is worth hardly anything.
I was planning on starting up AVCs through the LGPS and take as the max lump sum at 61 and use this for us both to live off until 67. 

We can afford £400 pcm into AVC or elsewhere for next 6 years ( when mortgage is paid off) and could then up this to £1000 pcm.

Or should we be paying more into my partners DC pension? Though I'm averse to this as prefer flexibility of the AVCs rather than a small annual pension. Should I be looking at S&S ISA? I'm nervous about this as I've no idea about investing and risk adverse.

What am I not considering?

Our only savings are approx £10000 in regular savers and premium bonds and £15000 saved for daughters university parental contribution. Both of us are only children and have possibility of inheritance in next 10 - 20  years depending on parents care needs obviously.

Thanks for reading and any advice much appreciated.

NedS

It's worth considering if your partner will have sufficient income in retirement to fully utilise his tax free allowance. You mention you are targeting an income of around £24,000 for both of you in retirement. Ideally this would be split equally between you and you would pay no income tax. If that isn't currently the case then there will be tax advantages in retirement by building up his pension rather than further enhancing your own pension to the point where you may become a tax payer in retirement.

OldBeanz

First thing is to realise your partner does not have to take a small annual pension from his DC Pension. He can withdraw it as he wants but taking advantage of tax breaks makes the most sense.
Work out how much you would need if one of you preceded the other, would both of you have enough money to have a reasonable/good/luxurious lifestyle thereafter.
You also need to be aware of the amount you can put into your AVC which would be (20 x Annual Pension)/3 - (existing lump sum) which given the figures above would be (£12750x20)/3 -(13000) which is £72,000. So as long as you take this from taxed income you can accumulate that into your AVC saving tax on the way in and none on the way out - paying in £8 and it is made up to £10. A 25% uplift. You would want to invest this in shares for the money to grow on top of that. The AVC has to be taken at the same time as the main pension to benefit from this.
Your partner can also pay into a pension from taxable income and withdraw up to the tax allowance plus 25% on top so in England £16,666 per year when he retires. That allows him to draw at 61 for 6 years before his pension is due a sum of £100k but again he would get an uplift of 25% by tax relief.
These may give you something to start thinking about and could be what you consider doing with the first £172k of pension savings.
Some might debate the benefit of paying off a low rate mortgage early when pension savings are given such an uplift.

itsmecathy

NedS said:

It's worth considering if your partner will have sufficient income in retirement to fully utilise his tax free allowance. You mention you are targeting an income of around £24,000 for both of you in retirement. Ideally this would be split equally between you and you would pay no income tax. If that isn't currently the case then there will be tax advantages in retirement by building up his pension rather than further enhancing your own pension to the point where you may become a tax payer in retirement.

Thank you. I see your point about best if our pensions were similar but not sure that is achievable.  I will be paying some tax once I get to SP age (SP pension plus LGPS pension) even if I make no further provision. I had not considered tax liability between early retirement and SP age as I thought I could use any AVCs lump sum and withdraw it all tax free (I now realize there is a limit, thanks Oldbeanz). 

itsmecathy

OldBeanz said:

First thing is to realise your partner does not have to take a small annual pension from his DC Pension. He can withdraw it as he wants but taking advantage of tax breaks makes the most sense.
Work out how much you would need if one of you preceded the other, would both of you have enough money to have a reasonable/good/luxurious lifestyle thereafter.
You also need to be aware of the amount you can put into your AVC which would be (20 x Annual Pension)/3 - (existing lump sum) which given the figures above would be (£12750x20)/3 -(13000) which is £72,000. So as long as you take this from taxed income you can accumulate that into your AVC saving tax on the way in and none on the way out - paying in £8 and it is made up to £10. A 25% uplift. You would want to invest this in shares for the money to grow on top of that. The AVC has to be taken at the same time as the main pension to benefit from this.
Your partner can also pay into a pension from taxable income and withdraw up to the tax allowance plus 25% on top so in England £16,666 per year when he retires. That allows him to draw at 61 for 6 years before his pension is due a sum of £100k but again he would get an uplift of 25% by tax relief.
These may give you something to start thinking about and could be what you consider doing with the first £172k of pension savings.
Some might debate the benefit of paying off a low rate mortgage early when pension savings are given such an uplift.

Thank you! It makes complete sense that the annuity rates for the DC pension are not the best option, and my partner could drawdown instead. The low annuity quoted made me think it was not worth bothering at all.

Once I have got my head around this a bit more I will try to work out what happens once one of us dies.

Thanks for the tip about paying into pension rather than mortgage overpayment due to the tax uplift. Before reading here yesterday my plan had been to overpay all our spare money to the mortgage! I'm still not quite understanding why paying it off a bit early, and then throwing everything not going on mortgage into pensions for a longer period isn't a good idea but I'll try to work this out.

OldBeanz

itsmecathy said:

OldBeanz said:

First thing is to realise your partner does not have to take a small annual pension from his DC Pension. He can withdraw it as he wants but taking advantage of tax breaks makes the most sense.
Work out how much you would need if one of you preceded the other, would both of you have enough money to have a reasonable/good/luxurious lifestyle thereafter.
You also need to be aware of the amount you can put into your AVC which would be (20 x Annual Pension)/3 - (existing lump sum) which given the figures above would be (£12750x20)/3 -(13000) which is £72,000. So as long as you take this from taxed income you can accumulate that into your AVC saving tax on the way in and none on the way out - paying in £8 and it is made up to £10. A 25% uplift. You would want to invest this in shares for the money to grow on top of that. The AVC has to be taken at the same time as the main pension to benefit from this.
Your partner can also pay into a pension from taxable income and withdraw up to the tax allowance plus 25% on top so in England £16,666 per year when he retires. That allows him to draw at 61 for 6 years before his pension is due a sum of £100k but again he would get an uplift of 25% by tax relief.
These may give you something to start thinking about and could be what you consider doing with the first £172k of pension savings.
Some might debate the benefit of paying off a low rate mortgage early when pension savings are given such an uplift.

Thank you! It makes complete sense that the annuity rates for the DC pension are not the best option, and my partner could drawdown instead. The low annuity quoted made me think it was not worth bothering at all.

Once I have got my head around this a bit more I will try to work out what happens once one of us dies.

Thanks for the tip about paying into pension rather than mortgage overpayment due to the tax uplift. Before reading here yesterday my plan had been to overpay all our spare money to the mortgage! I'm still not quite understanding why paying it off a bit early, and then throwing everything not going on mortgage into pensions for a longer period isn't a good idea but I'll try to work this out.

A balanced investment in shares with dividends re-invested should see you earn 1-2% more than inflation. Interest rates at present are about the inflation rate so you should be able to do better investing than paying off the mortgage (sheltering money towards the end). A pension will also give you an uplift of 25%. There are numerous threads elsewhere on MSE boards advising on paying off a mortgage early. It does not always make sense especially with such low interest rates. The LGPS AVC is virtually unique within HMG based pensions in allowing you to draw so much tax free in this fashion. I am ploughing as much as I can into my wife's AVC only being restricted by the amount of tax she pays. 
Another thing to consider is that your partner will be 55 in 4 years time when he will have access to his pension if needs be giving you the ability to syphon more of your spare cash through his pension as it would be accessible if really needed (he could take 25% tax free). Or more but that would then restrict how much he could contribute.
Having the gold nugget of your LGPS pension gives you the option to adjust your risk appetite accordingly.

draiggoch

Just one point that does not seem to have been mentioned. Will your husbands employer contribute more to the SHPS DC fund if he does so? Most of my colleagues have stuck at the lower contribution rates as they haven't realised they will get a higher employer contribution if they pay more. This would make it more worthwhile to pay into his pension than the AVC especially if drawing down prior to state pension.