LGPS AVC, APC or what else?

Arthur_B_Wellesley

I’ve read similar threads on this subject and getting myself confused.  

I’m 50, having paid into a LGPS scheme since I was 18.  Now paying 40% income tax, so seems sensible to pay extra pension provision instead of HMRC.   I plan to retire early, at 57’ish, and take a hit drawing LGPS early.  

So what’s my best option if looking to invest an additional £600 or so per month?  AVC, APC or
something else,  for purposes of both tax relief and to soften the hit of retiring early?  The LGPS’s AVC providers are Standard Life or Scottish Widows. 

Thanks

MX5huggy

Does your employer off AVC via Salary Sacrifice? If not then suggest it they save NI as well as you. 

Your going to have a big pot of DB pension I think a bit if DC via AVC or even a SIPP is a good combination. APC looks expensive (because it’s buying more valuable benefits without an employers contribution). 

You need to check out Life Time Allowance, someone else will tell us what you have to ask the scheme administrator for to be told this. You can’t exceed this (well you can but clobbered for tax). 40 years service earning £50k you might be getting closer than you think. https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

The advantage of the AVC is that you can take it all as tax free lump sum in some circumstances the problem with this is you have to take it at the same time as your main benefits. Alternatively you could go for a SIPP which you could take before main benefits so delaying and reducing the hit on the pension. £600 per month (increasing with inflation) for 7 years invested conservatively giving 2% comes out at about £62k which £12k you take as tax free and the rest if you split over 2 or 3 years and pay basic rate on. So you could “save” taking the pension till 59 or 60. 

Don’t forget to check your State pension status that’s another £9500 at state pension age. 

Silvertabby

Arthur_B_Wellesley said:

I’ve read similar threads on this subject and getting myself confused.  

I’m 50, having paid into a LGPS scheme since I was 18.  Now paying 40% income tax, so seems sensible to pay extra pension provision instead of HMRC.   I plan to retire early, at 57’ish, and take a hit drawing LGPS early.  

So what’s my best option if looking to invest an additional £600 or so per month?  AVC, APC or
something else,  for purposes of both tax relief and to soften the hit of retiring early?  The LGPS’s AVC providers are Standard Life or Scottish Widows. 

Thanks

APCs are good if you intend to work on until normal retirement age, not so good if you want to go at 57.  This is because APCs are reduced for early payment, so retiring 10/11 years early would result in a very hefty reduction on top of your main scheme reductions.

AVCs are popular with those who want to maximise their tax free cash without commuting/reducing their annual pensions.  Or all or some of the AVCs may be used to buy additional LGPS pension.  Whilst the purchase factors are far more generous than open market annuity rates, the factors are age related - so £XK AVCs converted at age 57 will buy less pension than £XK AVCs converted at NRA.

Is retiring at 57 the be all and end all?  The reason I ask is that you have R85 protections in respect of your pre 2008 service which don't kick in until age 60.  If you deferred your retirement until age 60, then your overall reduction would be considerably less.

Or if 57 is now set in concrete, you may want to consider deferring payment of your LGPS benefits until 60, and financing the 3 years in between with a SIPP or other means of saving?  Not my forte, but I'm sure others will pop up with some more ideas for you.

daveyjp

OP if considering AVCs and salary sacrifice is an option offered by your employer not all companies are set up to accept SS AVC payments.

Standard Life are, Scottish Widows aren't.

Arthur_B_Wellesley

Thanks for the replies this far.  

The LGPS AVC webpage confirms employer deducts from pay and passes payment to the AVC provider, but only after NI taken. 

Retiring at 57 is led by parents having died in their 50s and never enjoying a retirement.  There’s more to life. 

I’m thinking AVC for tax relief, take as much lump sum tax free as available when I retire at 57, then use the residual AVC pot to purchase an annuity to top-up monthly income from age 57 to 67 when state retirement pension kicks in.  Any obvious flaws to this plan?

AlanP_2

Arthur_B_Wellesley said:

Thanks for the replies this far.  

The LGPS AVC webpage confirms employer deducts from pay and passes payment to the AVC provider, but only after NI taken. 

Retiring at 57 is led by parents having died in their 50s and never enjoying a retirement.  There’s more to life. 

I’m thinking AVC for tax relief, take as much lump sum tax free as available when I retire at 57, then use the residual AVC pot to purchase an annuity to top-up monthly income from age 57 to 67 when state retirement pension kicks in.  Any obvious flaws to this plan?

There are some LGPS schemes that offer Salary Sacrifice for AVCs so the national LGPS pages won't tell you what your options are, you would need to ask Pension Admin.

ANY pension contributions in your situation will attract tax relief unless you go really high on your AVC contributions and reduce your taxable pay dowen to less than your Personal Allowance so AVC, APC or SIPP would work equally well from that respect (if you did want to go below Personal Allowance you would need to use a SIPP for some of it at least, ask for more info if relevant).

You can have a maximum of {(20 * Annual DB) + Pre-2008 lump sum + AVC pot] as a Tax Free Lump Sum. To achieve "as much lump sum tax free as available" you will probably need to commute some of your annual pension to get there.

Why would you convert annual pension into lump sum at a ratio of £1 lost each year for £12 of tax free lump sum and then use some of that lump sum to buy a taxable annuity? Far better in my opinion to maximise the TFLS without sacrificing any annual pension.

£600pm for 7 years = £50,400, say £60k to allow for some investment growth. Plug that in to the formula above along with the other figures from your most recent pension statement and see where that gets you to. On £50k+ a year I would be surprised if it gets near the maximum level but that will depend on salary profile over career plus future salary / promotion expectations.

Using the TFLS to supplement annual pension makes sense but can't see the benefit of an annuity unless there is something we don't know.

Have you checked your State Pension forecast, reading past the headline figure to see what your personal situation is?

Is there a spouse / partner that can be included in financial planning? In our circumstances (both in LGPS) we are aiming to maximise individual benefits to achieve the best possible outcome. I am paying about 75 % of my salary in to AVCs this tax year and retiring later this year but deferring LGPS. Will draw on a SIPP instead and live off that whilst my wife carries on working and will increase her AVCs to the same sort of level for 1 to 2 years (net result tax I pay on SIPP will be cancelled out by tax she saves on AVCs) before both starting LGPS benefits with associated tax free lump sums.

Have you worked out what you need / want as a retirement income and compared it to what you will get at various ages?

Arthur_B_Wellesley

Alan_P2 - Just to be clear, I’m not suggesting converting LGPS into lump sum to purchase an annuity.  I was referring to the AVC pot, and extracting as much as I can tax free at point of retirement, but using any residual amount of the AVC pot to purchase an annuity for age 57-67. 

MX5huggy

When you look a Annuity rates I doubt you’ll want one. You will have a big fixed index linked income. You can just spend the AVC cash over those 10 years.

AlanP_2

Arthur_B_Wellesley said:

Alan_P2 - Just to be clear, I’m not suggesting converting LGPS into lump sum to purchase an annuity.  I was referring to the AVC pot, and extracting as much as I can tax free at point of retirement, but using any residual amount of the AVC pot to purchase an annuity for age 57-67. 

Glad to hear it, I based my comment on your "as much as available" so now that's been clarified.

I doubt you will have a surplus if your AVC is going to be in £60k region, or even at £100k but you would need to take a view on that based on your DB pension & pre-2008 lump sum.

A £10k pa pension can support a TFLS of £66.6k.
 A £20k pa pension can support a TFLS of £133.33K