In LGPS, should I go for an AVC or APC?

daveyjp

Some LGPS AVCs are offered through salary sacrifice.  The NICs saved can be a valuable further contribution to the fund.

AlanP_2

ElephantBoy57 said:

Silvertabby said:

 AVCs are usually taken out in order to maximise the tax free cash option - but they can be used to purchase added pension at (at least currently!) very favourable rates.

It really depends on when you want to retire.

I am 59 and I can afford to buy some AVC, is there a defined amount that £1,000 would increase by?

Do you mean how much will £1000 invested in AVCs grow by in X number of years, otr do you mean how much additional LGPS pension will £1000 in an AVC fund buy me?

AlanP_2

DiggerUK said:

Buying ' added' years is a benefit long since disappeared, sad but true.
Instead of gambling your retirement savings with equities in pensions through APC's, AVC's etc.,  might I suggest you put gold ETF's or ETC's in a tax wrapped SIPP or ISA. 

Failing that you could simply buy UK legal tender gold coins. No VAT, no CGT, no Income Tax..._

Apart from the fact that the LGPS allopws you to buy added pension via APCs and they are not invested in equities but paid to the scheme administrators in return for guaranteed income at a future date you are corrrect, or to put it simpler absolute rubbish.

Putting that aside, do you get a 20/40% tax break using your suggestion, or even more if it is a Salary Scrifice AVC?

AlanP_2

OP - Do you ideally want a higher annual pension or do you want to build a tax free lump sum?

APCs will provide additiional pension whilst AVCs will build a lump sum pot that can be taken tax free (within limits), used to buy additional pension at time of retirement, transferred out to a personal pension (why would you do that and lose tax free element?) or a combination of these.

My wife and I looked at both and went for AVCs as we were happy with the amount of LGPS annual pension we would get and preferred the large tax free pot option but guaranteed income may be more important in your circumstances.

ElephantBoy57

AlanP_2 said:

Do you mean how much will £1000 invested in AVCs grow by in X number of years, otr do you mean how much additional LGPS pension will £1000 in an AVC fund buy me?

I don't know anything about AVCs, so was just asking. I have £6,000 in shares and a mortgage. If my shares increase in value next year I was going to pay some mortgage off.

Maybe it would be worth thinking about AVCs?

jamjar92

ElephantBoy57 said:

AlanP_2 said:

Do you mean how much will £1000 invested in AVCs grow by in X number of years, otr do you mean how much additional LGPS pension will £1000 in an AVC fund buy me?

I don't know anything about AVCs, so was just asking. I have £6,000 in shares and a mortgage. If my shares increase in value next year I was going to pay some mortgage off.

Maybe it would be worth thinking about AVCs?

@ElephantBoy57 When are your retiring, if 60? I would convert your shares to cash to top up your salary, and pay £6000 (at least, over the year) into your AVC pot from your salary which you will get tax relief as Alan_P2 stated above at 20 or 40%, more if done by SSAVC. Then you take the lump sum at 60 (not long to go) and paydown the mortgage then. Mortgage interest rates are low. Just invest the AVC into cash or some other low risk fund.

OldBeanz

ElephantBoy57 said:

AlanP_2 said:

Do you mean how much will £1000 invested in AVCs grow by in X number of years, otr do you mean how much additional LGPS pension will £1000 in an AVC fund buy me?

I don't know anything about AVCs, so was just asking. I have £6,000 in shares and a mortgage. If my shares increase in value next year I was going to pay some mortgage off.

Maybe it would be worth thinking about AVCs?

The major benefit of AVCs with the LGPS is that the money can be taken as a 25% tax free lump sum if taken at the same time as the main pension.
To calculate this you need to work out when you want to retire and what your pension will be worth. Many authorities use this facility https://lgssmember.pensiondetails.co.uk
To then calculate how much you can take as cash you need to calculate ((Annual Pension *20)/3 - any pre-2008 lump sum). So for example if you calculated a pension of £15k pa then that times 20 would give you a pension value of £300k so you could have an AVC worth £100,000 (less any pre2008 lump sum) which is 25% of the now £400k total value.
Paying into the AVC should be from taxable income (you have to pay it from salary (you cannot pay in a lump sum greater than your salary) and do not want to pay in too much to take your salary under £12.5k). So for every £100 you pay in you would have only been paid £80 so gaining an uplift of 25%. There are a few restricted investment opportunities (from low to high) but any investment with a 25% start must have a good chance - both over a long time or packing in low risk in the years before.
If you overshoot your AVC then any extra can be used to buy extra pension. The AVC may be taken in other forms but will not have the above advantage.
We tell this to LGPS staff on a regular basis

OldBeanz

Silvertabby said:

suezd said:

I am 49 and hoping to retire earlier than 67 and confused by how best to achieve this. I’m fortunate to be in the LGPS. Would buying back years with an APC be the best option? 

Rule of thumb is that APCs are good value if you intend to carry on (or at least leave your benefits deferred) to your NRA, because of the early retirement reductions.  AVCs are usually taken out in order to maximise the tax free cash option - but they can be used to purchase added pension at (at least currently!) very favourable rates.

It really depends on when you want to retire.

Always wondered about this rule of thumb. It is normally said (ok a rule of thumb) that the cost to the pension scheme will be neutral so presumably they calculate the cost from pension age to 85 (rough age you will live to if you reach 65) then divide that amount by the years paid and arrive at the adjusted figure (so that is cost neutral to average death age). Now as people are drawing this money before they get their state pension if their pension is over £12.5k then they will be paying less tax for those extra years (20% of £9k) which sounds good. Downside being if they live much past 85. Or is there a better way of working this out?

Silvertabby

OldBeanz said:

Silvertabby said:

suezd said:

I am 49 and hoping to retire earlier than 67 and confused by how best to achieve this. I’m fortunate to be in the LGPS. Would buying back years with an APC be the best option? 

Rule of thumb is that APCs are good value if you intend to carry on (or at least leave your benefits deferred) to your NRA, because of the early retirement reductions.  AVCs are usually taken out in order to maximise the tax free cash option - but they can be used to purchase added pension at (at least currently!) very favourable rates.

It really depends on when you want to retire.

Always wondered about this rule of thumb. It is normally said (ok a rule of thumb) that the cost to the pension scheme will be neutral so presumably they calculate the cost from pension age to 85 (rough age you will live to if you reach 65) then divide that amount by the years paid and arrive at the adjusted figure (so that is cost neutral to average death age). Now as people are drawing this money before they get their state pension if their pension is over £12.5k then they will be paying less tax for those extra years (20% of £9k) which sounds good. Downside being if they live much past 85. Or is there a better way of working this out?

No, because there are too many variables.  It's like when pensioners asked me what would give them the best returns - standard pension and lump sum, or commute the maximum lump sum.  My reply would be, without knowing their date of death, the break even point would be about 14 years.

ElephantBoy57

OldBeanz said:

The major benefit of AVCs with the LGPS is that the money can be taken as a 25% tax free lump sum if taken at the same time as the main pension.

Thanks, I get that now. So if retiring early it would be classed as income when I received it from the WYPF.

In order to pay less tax, I would need to retire before I receive my state pension and early in the tax year.