Choices - Investing over AVC pension payments

stuart746

Hello all,
My wife and I currently pay £600 a month into our respective AVC accounts (both Pru Teachers AVC - she is a senior leader in a school, I am a uni Prof). We have been taking this fairly passive strategy for the last 10 years or so (we are in our late 40s) and the AVCs complement our DB pensions which are forecast to be comprehensive at age 60. So far, so good, but with this rather conservative approach I wonder if there is an opportunity cost here as although we receive higher rate tax relief it feels as though the AVC pot increases are modest. We have some limited S&S ISA savings in HL, around £20k, and could push more into those. While inflation is low I'm not worried about AVC pots, but things can easily turn and I wondered if anyone had thoughts about how to rebalance or do you think we should just keep it simple. Happy to expand on the details if it helps. In the back of my mind are a number of questions about timeline to retirement, inheritance and tax planning, but would like to be more adventurous if possible!
Thanks

NottinghamKnight

You'll need to post specific details about what you are invested in to get any sensible comment. 

stuart746

NottinghamKnight said:

You'll need to post specific details about what you are invested in to get any sensible comment. 

Good point! If you are familiar with the Pru AVCs, you will know that investment choices are limited and for a while both my wife and I selected default with-profits and index-linked funds. I accept we could be more adventurous here, though Pru have some limited investment choices. With the HL fund we invested in Vanguard 60% equity lifestyle strategy.. again, a fairly conservative choice.

stuart746

Thank you for your very helpful response James. Yes, the lifetime allowance is in the back of my mind, though I started a bit later into professional life and my wife had periods of maternity which meant we are now around 40% of the allowance. However, with another 10-15 years of employment I do agree that for both of us our earnings potential could take us to the threshold by retirement. When you say higher tax on withdrawals I suppose you mean the AVC, which I had thought about and would be happy to defer any payments if it is not needed. This is food for thought and I was not aware that AVC pots are combined with DB benefits to assess lifetime allowance. It seems counter intuitive as DB is not a pot as such but a promise to deliver x benefits on retirement. 

NottinghamKnight

stuart746 said:

Thank you for your very helpful response James. Yes, the lifetime allowance is in the back of my mind, though I started a bit later into professional life and my wife had periods of maternity which meant we are now around 40% of the allowance. However, with another 10-15 years of employment I do agree that for both of us our earnings potential could take us to the threshold by retirement. When you say higher tax on withdrawals I suppose you mean the AVC, which I had thought about and would be happy to defer any payments if it is not needed. This is food for thought and I was not aware that AVC pots are combined with DB benefits to assess lifetime allowance. It seems counter intuitive as DB is not a pot as such but a promise to deliver x benefits on retirement. 

Yes, a figure of 20x the db pension is typically calculated as a figure for lifetime allowance so pension of £20k per year would use £400k of annual allowance.

stuart746

Thanks NK. Helpfully the Teachers Pension Scheme website gives you the percentage of your lifetime allowance so it is easy to work out, but I was not aware that this is added to the AVCs... good to know, and this may influence future planning.

stuart746

Then other (minor) point to mention is that the TPS scheme changed in 2012, I think, so DB 1/80th final salary became 'career average'... a bone of contention, but hopefully will not impact on figures overall.

NottinghamKnight

stuart746 said:

Thanks NK. Helpfully the Teachers Pension Scheme website gives you the percentage of your lifetime allowance so it is easy to work out, but I was not aware that this is added to the AVCs... good to know, and this may influence future planning.

It might do but many don't, just remember it is your responsibility to monitor and any penalties (55% tax charge for exceeding LTA) will be your responsibility to pay.