LGPS AVC

Pipkin1812

I have been paying into scheme since 1983 and will benefit from R85. I am 56 and hoping to retire at 60. I pay £300/ month into a linked AVC set up around 18 months ago. Is it worth pouring more into the AVC at this stage?Thanks. 

OldBeanz

We cannot give advice but. You need to go online and find out how much your projected pension is at 60. You can then calculate how much you can maximise your tax free lump sum. Every £80 uplifted 25% to £100 for a basic rate tax payer is a good return even without any investment growth.
The calculation is (annual pension x 20) /3 (- any pre 2008 lump sum). This allows you to take 25% of the total notional value of the pension tax free. 
So if you were forecast a pension of £3k and a lump sum of £1k then the calculation would be (£3000 × 20) = £60000 ÷ 3= £20000 - £1000 = £19000. Thus ending up with a total pension value of £80k with 25% lump sum (AVC£19k +£1k).
If you overshoot with your AVC then they allow you to buy 'extra pension' at a good rate so better to over rather than undershoot.
Your decision.

Silvertabby

Calculation for finding the maximum 25% tax free cash is:

20 x annual pension plus 1 x automatic lump sum plus 1 x AVC fund x 25%.

Note that your R85 protections will only apply to your pre 2008 service.  

Pipkin1812

Thanks both. If I took my pension today I would get £12.5K pa plus maximum tax free cash of £80K (based on early reduction figures). My AVC current value is around £3K. If I retire at 60 (another 4 years) then  values will go up due to less reduction. Am wondering if paying more into my AVC is best or look at some other short term investment options, private pension, ISA etc. Any general thoughts?

Laycity

Pipkin1812 said:

Thanks both. If I took my pension today I would get £12.5K pa plus maximum tax free cash of £80K (based on early reduction figures). My AVC current value is around £3K. If I retire at 60 (another 4 years) then  values will go up due to less reduction. Am wondering if paying more into my AVC is best or look at some other short term investment options, private pension, ISA etc. Any general thoughts?

You need to hammer your AVCs for the reasons above especially if it’s via salary sacrifice. You’ll be saving tax and NI contributions. It’s a shame you’ve not realised earlier as you’ve only 4 years left working so it may be difficult to get to the optimum £80 -100K using the calculation above. You’d be able to get all this tax free on triggering your LGPS.

Retireinten

Best to avoid taking the max lump sum by converting a chunk of your pension as its not considered good value. Far better to max the AVCs and use this to boost your lumpsum if you can afford to do it.

If your Authority doesn't offer salary sacrifice AVCs its worth suggesting this to them. Most councils are looking to cut costs, the admin process to do this is reasonably straight forward and there is a cost saving for both yourself and your LA in going down this route.  

OldBeanz

Pipkin1812 said:

Thanks both. If I took my pension today I would get £12.5K pa plus maximum tax free cash of £80K (based on early reduction figures). My AVC current value is around £3K. If I retire at 60 (another 4 years) then  values will go up due to less reduction. Am wondering if paying more into my AVC is best or look at some other short term investment options, private pension, ISA etc. Any general thoughts?

You mention the maximum tax free cash you can take from your pension, what is the minimum excluding AVC? Most people try to draw as much annual pension as they can while maximising the tax free cash from their AVC.
The LGPS website allows you to pick a retiral date and guesstimate your pension reasonably accurately (based on your perceived salary growth). 

Silvertabby

Most LGPS AVCs are set up in order to take advantage of the 'tax relief in, tax free out' option.  You'll have to go some to get your AVC fund to a level which takes you over the 25% max, but if your priority is to maximise your tax free cash then this would be better than commuting part of your pension.

Pipkin1812

OldBeanz said:

Pipkin1812 said:

You mention the maximum tax free cash you can take from your pension, what is the minimum excluding AVC? Most people try to draw as much annual pension as they can while maximising the tax free cash from their AVC.
The LGPS website allows you to pick a retiral date and guesstimate your pension reasonably accurately (based on your perceived salary growth). 

Thanks. My LGPS lump sum is around £38K and pension would be around £20K pa if I retire at 60. I only have just over £3K in the AVC (it is salary sacrifice, I pay £300 a month currently).  I think the general advice is to pay as much as I can afford into the AVC, am I right?  

saucer

Pipkin1812 said:

OldBeanz said:

Pipkin1812 said:

You mention the maximum tax free cash you can take from your pension, what is the minimum excluding AVC? Most people try to draw as much annual pension as they can while maximising the tax free cash from their AVC.
The LGPS website allows you to pick a retiral date and guesstimate your pension reasonably accurately (based on your perceived salary growth). 

Thanks. My LGPS lump sum is around £38K and pension would be around £20K pa if I retire at 60. I only have just over £3K in the AVC (it is salary sacrifice, I pay £300 a month currently).  I think the general advice is to pay as much as I can afford into the AVC, am I right?  

Certainly what I would be doing. That 100% tax free lump sum, subject to not exceeding 25% of the total value of the pension (as outlined by Silvertabby above), is a really strong advantage of the LGPS. The AVC is your best route to boosting the amount of tax free lump sum you’ll get. 

Pipkin1812

Many thanks everyone. Using the calculations given I think my 25% max would be around £110K so I’m very unlikely to get near that. I probably will increase my monthly payments as much as I can afford, to boost tax free lump sum and maintain drawing as much from pension as I can when I retire.