Is it worth starting AVCs?

Moleshome

I'm planning to take early retirement at the end of March next year. I'm on a Defined Benefits pension and not currently paying any AVCs.

We recently came into an inheritance and have paid off the mortgage. With that out of the way there's a fair bit of spare cash each month so I was wondering whether it would be worthwhile putting it into AVCs. I realise that I'm not going to see anything in the way of growth in the short term but I believe they would come out before tax so there would be a benefit from that side of things. I suppose the question is what access would I have to that money when I retire? I've seen that I can take 25% tax free as a lump sum but it's not clear whether that's each year or just once at retirement.

Marcon

Moleshome said:

I'm planning to take early retirement at the end of March next year. I'm on a Defined Benefits pension and not currently paying any AVCs.

We recently came into an inheritance and have paid off the mortgage. With that out of the way there's a fair bit of spare cash each month so I was wondering whether it would be worthwhile putting it into AVCs. I realise that I'm not going to see anything in the way of growth in the short term but I believe they would come out before tax so there would be a benefit from that side of things. I suppose the question is what access would I have to that money when I retire? I've seen that I can take 25% tax free as a lump sum but it's not clear whether that's each year or just once at retirement.

I think you're getting a bit confused - this isn't the most straightforward area.

AVCs are only 100% tax free if you use them as part of your DB pension tax free pension commencement lump sum. 

Otherwise you can only take a 25% tax free lump sum once from your AVCs, with the rest being taxable. Whether you can use them to 'buy' extra pension in your DB scheme, or have to use them outside the DB scheme (either as taxable income or to buy an annuity) depends on the rules of your particular DB scheme, so reading the scheme booklet/checking online information/asking the scheme administrators is your next step.

The alternative is to open a personal pension and pay into that, which might give you more flexibility.

If you currently pay contributions by salary sacrifice, increasing those might be the better bet because of the NI saving. Otherwise the tax breaks are the same whether you pay in to your AVC or open a personal pension.

dunstonh

AVCs are largely obsolete compared to alternative options.  However, there are still a few AVCs that are worthwhile.  And some schemes have alternatives to AVCs such as varients on buying additional years service.

I suppose the question is what access would I have to that money when I retire?

Before you look at solutions, you need to look at your objectives.  Once you know and understand your objectives, then you go looking for solutions to achieve those objectives in the best way possible.

 I've seen that I can take 25% tax free as a lump sum but it's not clear whether that's each year or just once at retirement.

Some AVCs have no tax free cash.   Some AVCs allow the tax free cash from the main scheme to be taken from the AVC and that results in higher than 25%.      

Most AVCs are old-fashioned products that haven't been modernised to levels other pensions have.  This is because schemes were not required to offer an AVC after 2006.     There still can be some benefits with some AVCs that make them better than individual pensions (like a SIPP) but most are not.

You are certainly going down the right route in respect of using pensions as they beat virtually all other alternative options.   So, don't back away from that.    But just have a think about what you want in later life, find out about the AVC your scheme offers and compare it to other pension options to see which is best.

MX5huggy

Be more specific on what is being offered. The DB scheme? And the AVC offer.

If it’s Local Government Pension with Salary Sacrifice AVC then fill your boots (well reduce your gross salary to the level of the National Minimum Wage, - there’s some other limits that need consideration as well, so how much are you paid and how much do you want to push through a pension?).