Taking 100% of AVC as a tax free lump sum and buying AVC pension query

OldBeanz

My wife is paying into her AVC and will use any surplus to buy extra pension which will be reduced because she will draw it 6 years early. Overshooting her AVC lump sum is better than undershooting as far as I am concerned.
Previously it has been stated by the LGPS gurus on here that the AVC surplus pension calculations are too personal to give any figures but the extra pension is always significantly better value than anything on the open market.
Others have said buying extra pension then drawing it early is not the best option but it suits us as things are then done and dusted while ensuring my wife will be comfortable when I am no longer around.
The extra pension is available whether you take the pension at 60 or 67. Taking the LGPS pension and AVC as one is the critical factor.

saucer

It is the way the pension systems e.g. Altair does the calc behind the scenes, as that is what the GAD guidance says, example:

https://www.swanseapensionfund.org.uk/current-employees/retirement/commutation/ 

I don't know where I am going wrong with this  but using that formula my OHs maximum TFLS is some 3 times higher, going on the forecast for the AVCs at retirement.  She has 2 AVCs, one being an old style 'with profits' which has been dormant for years, and another which is more of a diversified fund based AVC, but also salary sacrafice and through the Pru.  Am I going wrong including that as 'in house'?

Silvertabby

Purplelady65 said:

@Silvertabby - you said that the AVC can be used to buy extra pension at a reduced rate which hasn’t occurred to me until you pointed it out. I had originally looked at Additional Pension Contributions (APCs) but as there is no survivor’s pension and if you die while you’re contributing you lose your contributions plus the payout if you die after having accessed the pension for a short time is very low I’d ruled it out as an option. However in the LGPS AVC leaflet it says: 

“You can use some or all of your AVC plan to buy extra pension… if you take this option, your dependents will automatically get extra pension in the event of your death. This option is only available if you are still an active contributing member at the time of retirement.”

So I’m assuming this wouldn’t be an option if my OH retired at 60 but then didn’t take the pension until a few years later? I was wondering about taking the full tax free amount and then maybe using the rest to buy extra pension but not sure now. I also don’t know how much it would cost to buy extra pension via an AVC. Through the APC it would cost just under £12k gross to buy £1k of pension to access at age 67. 

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"Buy a top-up LGPS pension

If you were a member of the LGPS after 31 March 2014, you can buy a top-up LGPS pension with your AVC plan. The top-up pension you buy will increase in line with inflation. Any dependants who are entitled to a survivor pension when you die will automatically get part of the top-up pension.

If you left the LGPS before 1 April 2014 and did not take your pension immediately, you cannot use your AVC to buy a top-up pension."

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In theory, if your OH retires at 60 but defers payment of his benefits until later then he can still use some or all of his AVC pot to buy a LGPS top up.  In practice, it seems that there may be an element of 'employer discretion' at work here, so he should ask his own LGPS admin for confirmation before making any hard and fast decisions. 

The factors used aren't the same as the APC scheme.  Many variables are brought into play when calculating an AVC pension purchase, but I can say that the result would be way more than your OH could expect to get from an open market annuity.