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

OldBeanz

ElephantBoy57 said:

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.

The money you invest in the AVC is returned tax free as cash (up to the 25% of gross limits previously mentioned).
Any money from your WYPF monthly pension and State pension are taxed as income but not subject to NI. 

suezd

AlanP_2 said:

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.

Thank you, I just want to retire as early as possible with an annual income that is manageable to live on.  The lump sum via AVC sounds like it could be good option.

semiplural

suezd said:

Thank you, I just want to retire as early as possible with an annual income that is manageable to live on.  The lump sum via AVC sounds like it could be good option.

I hope this doesn't sound too obvious, but it's important to have a disciplined process.
Step 1: Work out what that target income would be.
Taking in to account expenses you will no longer have and any additional things like holidays cruises etc that you might want to do more of.
Step 2:  Compare this with you projected pension from the DB scheme.
If the pension is higher, then you are of the way there.
As mentioned by others, if you take you DB pension early it will be reduced by "actuarial reductions" which can often be quite severe. Does your scheme allow you to model how much you would get if you retire early?

Just to give an example of how I would personally look at this.

Suppose your annual required income would be £15,000 and you DB scheme would achieve that if you retired one year early. Your additional savings are and then seeking to buy you extra years of early retirement.

Unless your retirement date is a long way into the future, it is probably safest to assume that your extra savings won't increase in value (other than the tax relief of saving them into a pension wrapper). So effectively if you can save £30,000 you buy two years extra early retirement.

The plan then, in my view, to draw down from the separate extra savings pot to cover the first two years. You can do this tax efficiently in this example. Take an initial tax free lump sum of  £7,500 then £11,250 in year one and two - which is below the tax threshold.

The from year three (one year before normal retirement age) draw your DB pension.

Just to note though that you would need to review how this works with your DB pension, because whilst you would only be drawing it one year early, you would have stopped paying into it 3 years early which would reduce the income provided.

Again, just my opinion, but I think it would be simplest to do this via a personal pension separate rather than an AVC in your work scheme.

Important to note, I have gone a bit off-piste here from the original question re AVC vs APC. 

I have assumed (I think correctly, but you would need to run the numbers to check as it depends how generous your APC scheme is) that the AVC route would be more efficient.

In the case of the APC model, you would be increasing the amount of your DB pension so that you can then afford to decrease it via the actuarial  reductions coming from retiring early and still meet your retirement income target. As I say, I believe this would be less efficient, but you would need to run the numbers to check for sure.

The AVC (or separate personal pension) route is also more flexible as once you have reach 55 (under current regulations) you could flexibly access that pot if circumstances or aspirations change, without disturbing your main pension.

I hope that's helpful?

semiplural

Silly me - I didn't understand how the "spoiler" formatting works - in the above post - it's not actually a spoiler it's just a worked example, so click on the "spoiler" to see it.

suezd

semiplural said:

suezd said:

Thank you, I just want to retire as early as possible with an annual income that is manageable to live on.  The lump sum via AVC sounds like it could be good option.

I hope this doesn't sound too obvious, but it's important to have a disciplined process.
Step 1: Work out what that target income would be.
Taking in to account expenses you will no longer have and any additional things like holidays cruises etc that you might want to do more of.
Step 2:  Compare this with you projected pension from the DB scheme.
If the pension is higher, then you are of the way there.
As mentioned by others, if you take you DB pension early it will be reduced by "actuarial reductions" which can often be quite severe. Does your scheme allow you to model how much you would get if you retire early?

Just to give an example of how I would personally look at this.

Suppose your annual required income would be £15,000 and you DB scheme would achieve that if you retired one year early. Your additional savings are and then seeking to buy you extra years of early retirement.

Unless your retirement date is a long way into the future, it is probably safest to assume that your extra savings won't increase in value (other than the tax relief of saving them into a pension wrapper). So effectively if you can save £30,000 you buy two years extra early retirement.

The plan then, in my view, to draw down from the separate extra savings pot to cover the first two years. You can do this tax efficiently in this example. Take an initial tax free lump sum of  £7,500 then £11,250 in year one and two - which is below the tax threshold.

The from year three (one year before normal retirement age) draw your DB pension.

Just to note though that you would need to review how this works with your DB pension, because whilst you would only be drawing it one year early, you would have stopped paying into it 3 years early which would reduce the income provided.

Again, just my opinion, but I think it would be simplest to do this via a personal pension separate rather than an AVC in your work scheme.

Important to note, I have gone a bit off-piste here from the original question re AVC vs APC. 

I have assumed (I think correctly, but you would need to run the numbers to check as it depends how generous your APC scheme is) that the AVC route would be more efficient.

In the case of the APC model, you would be increasing the amount of your DB pension so that you can then afford to decrease it via the actuarial  reductions coming from retiring early and still meet your retirement income target. As I say, I believe this would be less efficient, but you would need to run the numbers to check for sure.

The AVC (or separate personal pension) route is also more flexible as once you have reach 55 (under current regulations) you could flexibly access that pot if circumstances or aspirations change, without disturbing your main pension.

I hope that's helpful?

That’s really helpful, thanks so much for your time.  5% is deducted for each year the pension is taken early. If I were to opt for my work AVC I could only take 25% of the AVC if were to retire early.