AVC/new investor help please

AliceBanned

Hello. Although an old-timer on MSE I know barely anything about investments and savings, and have managed to reach a point where I can start to save and need to do so.

I am looking into paying into my pension scheme's (LGPS) AVC with Prudential, maybe £250pm. My question is, is this any better than a SIPP or ISA? I want to reduce my income tax payments asap as I have just gone into 40% tax threshold due to a promotion. It seems a good trigger to get me making regular savings and get the tax benefits as well, but I don't understand whether tax benefits are similar whether it's AVC or SIPP? Is it just a case of with the AVC the tax savings are greater - as payments are taken before tax in my scheme? 

I also may want to access this 'fund' earlier than I take my LGPS so kind of use it as a 5-7 year savings account, so would a different savings option be better? I would have to transfer it out to take it before my LGPS, which I might want to do. I'd rather keep the LGPS savings as long as possible, as well as my private pension pot which I can take from 65 or lump sum from now. 

I am 55 and will probably have to work full time for another 7-10 years (unless my circumstances change but I'm not factoring in anything) but have only paid into company pension schemes since age 40. The LGPS seems generous (career average) and as I am relatively close to retirement I don't want to leave local government or go to another job without similar. I only have a private pension pot of £90k from previous employment, and also have a mortgage which I can pay off by retirement by downsizing/moving area - I live in the south east. 

dunstonh

I am looking into paying into my pension scheme's (LGPS) AVC with Prudential, maybe £250pm. My question is, is this any better than a SIPP or ISA?

Sometimes yes.  Sometimes no.  It depends on your objectives.  I noticed you havent mentioned the APC.  That is often a better option but again depends on objectives.

 I want to reduce my income tax payments asap as I have just gone into 40% tax threshold due to a promotion.

An ISA wont help then.

but I don't understand whether tax benefits are similar whether it's AVC or SIPP?

Similar apart from salary sacrifice wont be available on a personal pension, stakeholder pension or SIPP.   However, the in-house AVC has some product limitations which may or may not be an issue for you.

I also may want to access this 'fund' earlier than I take my LGPS so kind of use it as a 5-7 year savings account, so would a different savings option be better?

The LGPS AVC doesnt support drawdown.   So, you would need to transfer out of it come the time.  Or you can use an alternative now that does.   There are mixed signals as to whether partial UFPLS is available.  I have a client that uses partial UFPLS on the LGPS AVC but someone in the pensions section recently posted that it wasn't supported on their version.    There have been multiple versions over the years.

The APC, whilst likely the best option financially if staying to scheme age, it is not suited for earlier commencement.

AliceBanned

Thanks Dunstonh, didn't really think about the APC, but it is better in terms of returns as you say. I think I am confusing pension and savings as I don't have a clear enough plan.

Looking at it again maybe I could think about paying something into the APC, say £150pm which should take me below the 40% rate, and then save/invest completely separately. The APC doesn't have the flexibility of the AVC but if needed I could take a lump sum from the private pot earlier than retirement, eg if I want to reduce my hours at work for example. I have the separate pot and other means of increasing my income /downsizing should I need to. 

dunstonh

Thanks Dunstonh, didn't really think about the APC, but it is better in terms of returns as you say. I think I am confusing pension and savings as I don't have a clear enough plan.

At 55 you need a plan as the pension wrapper is not just about income provision in retirement.  It is also a tax efficient investment wrapper.   It beats S&S ISAs for most people.

Looking at it again maybe I could think about paying something into the APC, say £150pm which should take me below the 40% rate, and then save/invest completely separately. 

That may well be the best option.   APC to take advantage of the generous terms and then excess to a pension.

Whilst you are thinking about tax on the way in, you also need to think of tax on the way out.    If you retire before taking the scheme pension/state pension, you will have a number of years where you have your personal allowance available to you.    So, a pension gaining relief going in, wouldn't have tax coming out upto just over £16k  (25% tax free, 75% falling fully within the personal allowance)

So, a bit of mix and match is likely to be in order.       But make sure your priority is your objectives.  The APC is generous financially but if you go too heavy into that and not enough into building a pot to use for the 5-7 year gap, it could stop you from achieving your objective.

daveyjp

Is the AVC provided via a third party as a Shared Cost AVC? 

If so you will benefit from both tax relief and national insurance reduction which can also be paid into the fund, so a significant potential uplift.

If not ask your payroll/finance director why it isn't offered as an employee benefit.

AliceBanned

So I do think I'm financially a bit illiterate - it takes me a while to understand these things! I've just put this in as a hypothetical payment for the APC: 

This was the result:

Results

Total extra pension	£ 2,939.02
Years of agreement	11
Regular Cost to you before tax relief	£ 400.00
Regular Cost to your employer	£ 0.00
Total Regular cost	£ 400.00
Extra pension bought each year of agreement	£ 267.18
Your Normal Pension Age (NPA)	67
Based on a Regular cost of £13.61 (before tax relief) per £100 of extra pension. Does this mean in real terms I pay £267.18 per month, over 11 years (my maximum, to get £2,939.02 at today's value? Thanks

Albermarle

Thanks Dunstonh, didn't really think about the APC, but it is better in terms of returns as you say. I think I am confusing pension and savings as I don't have a clear enough plan.

Also using the correct terminology is helpful to avoid confusion in this area.

Saving is usually taken to mean putting money in a savings account. Here your money is safe,and you will receive interest. The downside is that in the long term, the interest is less than inflation, so your money slowly loses value.

However some cash savings for emergencies, everyday use etc is a good thing. I notice you did not mention this at all.

Investing is putting money into 'risk based assets'. This usually means investing in stocks and shares. These can go up and down in the short & medium term, but long term should bring a return above inflation. Normally this does not mean wheeler dealing in individual company shares, but holding mainstream funds for the long term. This will typically be in a Stocks and Shares ISA, or in a DC pension, as both offer certain tax advantages, over investing outside them.

In this context medium term is 5 to 10 years and long term > 10 years. Basically the longer you hold investments, the less likely you will make a gain rather than a loss.

Your LGPS pension is a DB ( defined benefit) pension, where you get a guaranteed income based on your salary and number of years worked ( calculated from a certain formula). I am not so familar with APC's, but I believe you can enhance the pension benefits by making them.

An AVC/SIPP/Personal pension is a DC ( Defined Contribution) pension. Here you basically build up a pot of money, you can withdraw from later. There is no guaranteed income, it depends how well the investment in the pension perform and how much you add of course.

I think the LGPS AVC arrangement is unusual, in that rather than being totally seperate, you can utilise the AVC in combination with the DB part, to extract more tax free cash when you start to take the pension.

AliceBanned

Thanks Albermarle. I am definitely looking for investment in that case, with advantages of reducing income tax. I do also need some emergency fund/savings - no I don't have any and know that I need to start. So I guess I need both!

AliceBanned

Albermarle said:

Thanks Dunstonh, didn't really think about the APC, but it is better in terms of returns as you say. I think I am confusing pension and savings as I don't have a clear enough plan.

Also using the correct terminology is helpful to avoid confusion in this area.

Saving is usually taken to mean putting money in a savings account. Here your money is safe,and you will receive interest. The downside is that in the long term, the interest is less than inflation, so your money slowly loses value.

However some cash savings for emergencies, everyday use etc is a good thing. I notice you did not mention this at all.

Investing is putting money into 'risk based assets'. This usually means investing in stocks and shares. These can go up and down in the short & medium term, but long term should bring a return above inflation. Normally this does not mean wheeler dealing in individual company shares, but holding mainstream funds for the long term. This will typically be in a Stocks and Shares ISA, or in a DC pension, as both offer certain tax advantages, over investing outside them.

In this context medium term is 5 to 10 years and long term > 10 years. Basically the longer you hold investments, the less likely you will make a gain rather than a loss.

Your LGPS pension is a DB ( defined benefit) pension, where you get a guaranteed income based on your salary and number of years worked ( calculated from a certain formula). I am not so familar with APC's, but I believe you can enhance the pension benefits by making them.

An AVC/SIPP/Personal pension is a DC ( Defined Contribution) pension. Here you basically build up a pot of money, you can withdraw from later. There is no guaranteed income, it depends how well the investment in the pension perform and how much you add of course.

I think the LGPS AVC arrangement is unusual, in that rather than being totally seperate, you can utilise the AVC in combination with the DB part, to extract more tax free cash when you start to take the pension.

What I am trying to work out to help me plan is whether a Stocks and Shares Isa could have equal tax advantages to pension contributions? Either would likely be invested for the short to medium term.  

My previous pension pot is defined contribution. I have seen how the LGPS seems far more valuable..at the moment anyway. Previous pot has been invested for 15 years and I daren't move it (but not allowed to add to it)- I am not generally risk averse in terms of investments but I have such small amounts at the moment for the future, that I am cautious on how to manage any change - whilst wanting a reasonable level of risk to get the potential benefits. Perhaps if I move the separate pension pot away (as it is linked to previous employer scheme) and make payments into that pot from my current salary...? Do I need an IfA? I did look into this previously but felt they were a bit overbearing and keen to get me to move the pension..

MX5huggy

The big plus of the LGPS AVC is that you can take it as your tax free lump sum. 

You have to take it at the same time as your LGPS to do this. But you should review your plan to delay taking main benefits, the reduction for taking it early only represents the cost of in being in payment longer. Presuming you have only post 2015 LGPS there is no automatic lump sum lump sum is expensive costing £1 of annual pension for every £12 of lump sum you opt for. Instead use your AVC pot to fund the lump sum and get the whole lot tax free. 

If the AVC is offered via Salary Sacrifice (shared cost). Then it’s win win with the NI savings on top of the income tax savings of using a SIPP. 

Read the info here (note Pru is currently changing its name and branding to M & G). https://www.mandg.com/pru/workplace-pensions/employees/public-sector-avc-schemes/local-gov

Albermarle

Emergency fund should be the priority. 3 months salary minimum ideally.

You can not directly reduce your income tax by investing.

If you invest via a S&S ISA, it just means you do not have to worry about any tax on any gains you make in future.
If you invest via a pension, you will get some tax relief added to your pension contributions, which means some of the tax you paid, will be added to the pension ( it is a bit more complicated than that though). Probably you will pay some tax when you take the pension, but overall there will be a tax benefit.