AVC - what type of fund would be the best option?

Purplelady65

I have previously posted on here around retirement planning and received some very useful suggestions which I’m grateful for. Both my OH and I are 56 and are planning on retiring at age 60 (or maybe 61 with all the cost of living increases) with DB pensions. My OH is in a LGPS scheme in his current job and because it doesn’t have a lump sum he could potentially link an AVC to the pension and then take the amount 100% tax free when he takes his pension. My OH could contribute around £750 gross to the AVC each month. He would pay this amount in until December 2025 when it would be left until he can access his LGPS pension at age 67 in 2032.

The AVC provider is the Prudential. There are 15 funds that can be chosen from the AVC fund and you can choose to invest a percentage in a number of funds. Neither of us know very much about investing and therefore not sure what risk level to go for. I’m aware that if the risk level is too low then this could erode the value of the investment over time but equally because the AVC will need to be taken at the same time as the pension to get the amount tax free then there is a fixed date that it will need to be accessed.

I have just looked at Multi Asset Funds to keep it simple. In total there should be around £30k invested from now until December 2025 (maybe more but no more than £40k). One fund (medium risk) invests in a minimum of 40% equities and a maximum of 80% equities. Another (lower to medium risk) invests a maximum of 30% (no minimum stated) in equities and another (lower to medium risk) is a minimum of 10% and a maximum of 40%. I didn’t know if there was any sort of unwritten rule that if the money will only be invested for a maximum of 10 years then it’s recommended that equities do not go above a certain % of the investment? There are also lifestyling options on these funds where they move them to lower then minimal risk but not sure if there are enough years that the money will be invested to do this? The default option if you don’t choose one is Prudential With Profits Fund (Multi Asset, Lower to Medium risk) which just says it is a diversified portfolio of UK and overseas shares, bonds, property and cash but with no further breakdown. I did wonder about paying for advice from an IFA but as it’s a relatively small amount we’re investing compared to big pension pots I thought it might not be value for money. Thank you in advance for any observations or suggestions.

MX5huggy

My first question is why have you decided to access the LGPS at 67? You can take it at 55 or any time between (or even later I think). There are obviously reductions but these are cost neutral, meaning you only “win” by taking it later when you live beyond average age 82 ish.

If you stick with your plan the first payment will be invested for approximately 10 years and the last 7 years. This is an acceptable investment horizon to use equities. Then it’s about risk, your tolerance of it and what is happening to the money after you get it back? Spending it immediately or reinvestment? 

Purplelady65

MX5huggy said:

My first question is why have you decided to access the LGPS at 67? You can take it at 55 or any time between (or even later I think). There are obviously reductions but these are cost neutral, meaning you only “win” by taking it later when you live beyond average age 82 ish.

If you stick with your plan the first payment will be invested for approximately 10 years and the last 7 years. This is an acceptable investment horizon to use equities. Then it’s about risk, your tolerance of it and what is happening to the money after you get it back? Spending it immediately or reinvestment? 

So a bit of background information. I will receive a DB pension of £24.5k when I'm 60 and will also have £4.5k pension in the 2015 NHS Care scheme. I will also have a lump sum of around £70k at age 60. My OH will have a DB pension of £17k at age 60 (no lump sum) and will have £4k pension in the LGPS scheme. I have also in the last couple of months started paying £150 a month into a SIPP to take me below higher tax rate. My original idea was to take the two age 67 pensions (NHS 2015 and LGPS) at age 60 with a 35% reduction on each. Between age 60 and 67 we will have less money during those 7 years but are more likely to be active and going on holidays e.t.c. At age 67 we will both be eligible for full state pensions. Suggestions on here in a previous thread were to use the £70k to bridge the gap between 60 - 67 rather than take a reduction in the age 67 pensions as that money will be inflation proofed and the £70k won't. Re the crossover point being around age 82. My OH does have a long term condition and his parents died relatively young  (late 60s and mid 70s). I don't have any long-term conditions and my family tend to live into late 80s / early 90s. Re level of risk I wouldn't have sleepless nights if it went down in value and re what would be happening to the money - no definite plans maybe any bigger spends needed on the house or give it to the kids for house deposits. 

MX5huggy

You are fully aware of the options and of course you can change your mind as the next 5 years unfold. 

I read it that the AVC money is not critical to your retirement plans. So an more aggressive fund choice could be ok.

If your timing of taking the AVC fund was terrible (that’s by luck not trying to time it). You could put the money straight back in the stock market to catch the expected rise. 

I have a smaller selection of Pru AVC funds to choose from (7 and one is cash!). I put 50% in the ethical fund, 25% in the international stocks fund and 25% in the with profits, if I had a choice it would be 100% a global index tracker (using these 3 gives the biggest spread possible). But I’m 10 years ish younger, but looking to take the pension earlier. There is little research to this, my light bulb moment was just get started investing, stock markets have always gone up over long periods of time. 

The 50% fund is now worth 53% of the 3 24% for international equity and 23% for the with profits showing which has performed better. 

Check the maximum you can take from the AVC tax free and your options if the AVC is worth more than this. 

AlanP_2

and will have £4k pension in the LGPS scheme.

Just be aware of the fact that if his CARE pension is £4k and the AVC pot is £40k then he won't get all that tax free:

(£4k * 20) + £40k = £120K ===> 25% would be £30k.


The excess won't be lost so not all doom and gloom by any means, as far sad I can tell it can be used to buy additional annual pension.

In terms of what to invest in what is your expected investment timescale? You say 2032 so 10 years, but what are you planning to do with the £40k then?

If it is spend it then you really do have a 10 year timescale in mind. If it is reinvest it inside an ISA to provide a nice cushion for the following 20-30 (hopefully) years then you have a 30-40 year timescale to plan for and could go for similar risk investments with the Pru for 10 years and then with ANO for the rest.

We made this error when we first stared using LGPS AVCs focusing on the value at retirement date rather than the longer term aspects with just a change of wrapper / provider along the way until someone on here pointed that out to me.

Purplelady65

Thank you AlanP_2 and MX5Huggy for your contributions - much appreciated. Yes, you're right re getting all of the AVC tax free as it will only be if the AVC does't exceed 25% of the total value of the pension plus AVC so something to bear in mind. I had temporarily forgotten that. 
MX5Huggy - a good reminder that it's better to get on with the investing rather than spending too long over thinking about it particularly as we've only got 3-4 years that we're going to be putting the money in. Thank you for sharing your split - I think we will do something similar and invest in 3 or 4 funds at lower to medium risk. 
AlanP_2 - thank you for pointing out investing in the AVC doesn't mean that we can't reinvest it so that's a really good point not to focus on the value at retirement rate but to view it as a wrapper / provider particularly as we haven't got a fixed plan for the money as hopefully we won't need it to live day to day on. 
Thank you - there are always nuggets to take away on this forum.