LGPS AVC or SIPP?

Chloe_G

Basically I am trying to find out - is there a greater benefit in starting AVCs linked to the LGPS or is a SIPP just as good?

I am 55 and in LGPS.  I will have enough pension to live on comfortably at 67 including full state pension.  I was thinking of starting AVCs linked to LGPS for the tax breaks.  My employer doesn't offer shared AVCs.  (I've discounted APCs.)  However, I am put off by the fact that the AVC sheme wouldn't be paid until I take my LGPS pension.  I will probably stop work before I'm 67 but think I'll be able to put off taking the pension until I am 67 and drawing on the AVC before then may be necessary.

If I start a SIPP now, am I right in thinking I could cash it in at any time if I wanted to and so this would give me more flexibility than an LGPS AVC which I would have no access to until I draw my pension?

Will a SIPP still give me the same tax breaks as the LGPS AVCs?  I asked payroll if they do shared AVCs and basically got a curt email back saying No.  Should I ask them if they do salary sacrifice - does that give greater benefits.

Thank you.

Sarahspangles

If your LGPS scheme added to your contributions AVCs might be more attractive. It’s a while since I left LGPS but if I’m remembering correctly one other advantage is that you can take a bit more tax free lump sum at commencement of your pension - 25% of your db pension plus the AVCs. But you get a poor commutation rate with your main LGPS pension so that’s a strategy that would only be financially advantageous in some niche scenarios.

A personal pension has lots of advantages and a SIPP is then the most flexible option, if you don’t mind the overhead of understanding and operating one. They’re easy to set up and you don’t need to interact with a payroll department to adjust your contributions, you just pay in what and when you like.

If you’re a basic rate taxpayer the SIPP provider will claim the tax relief and typically add it to your cash holding in the SIPP, so it’s there to add to the money from your contribution when you next invest.  So if you pay in £400 then it’s made up to £500. If you’re a higher rate taxpayer you do have to reclaim the tax overpaid from HMRC but it doesn’t imply you need to do a self assessment tax return, just a letter once a year.

If your LGPS employer did allow you to do salary sacrifice you wouldn’t have paid the tax on that part of your salary in the first place and you also avoid some NICs. If they offer that option….

When you get to drawing down your SIPP you can take it in one go with 25% of it tax free but there may be an advantage in taking it in instalments, as a ‘salary replacement’. For example, if you decided to retire before state pension age, and left at the end of March, then from April when the new tax year starts you can take up to your personal tax allowance from your SIPP - currently £12,570 - and pay no tax on that, plus add on 25% tax free. And again the next tax year. If you don’t actually need that income right then, or all of it, then you can use your ISA allowance to shelter it, and avoid paying tax on savings interest, assuming you also have savings outside your SIPP. 

Bimbly

SIPP allows you to take your money earlier than 67 (from 55, for you, as you say), so if you want to retire earlier, this is the obvious thing to do. And relatively simple.

I'm not familiar with LGPS per se (and I think different authorities are different), but if they allow contributions via salary sacrifice then you save on National Insurance as well as income tax. If you are a higher rate tax payer, all the tax goes into your pot, rather than 20% and claim back 20%.

One possibility is to look at the option of taking LGPS early. It will be reduced for early payment, but if you are putting lots of extra £ into the AVC and want to retire earlier than 67, this might be a good way to do it. You'd need to do the sums to figure out if it's worth it. Just one to think about.

Silvertabby

Most people pay LGPS AVCs for for their tax relief in/tax free (within HMRC limits) out.  However, tax free out only works when the AVCs are taken at the same time as the main scheme benefits.

Alternatively, some or all of the AVC fund may be used to buy additional index linked LGPS benefits at very favourable rates.

However, if the intention is to fund a gap between retirement and drawing (unreduced?) LGPS benefits then AVCs probably wouldn't be the way to go.

draiggoch

I’m in a similar situation regarding being in the LGPS and wanting to finish earlier than 67. I would suggest a mix of contributions, some to the AVC to produce a tax free lump sum and some to a SIPP to bridge between leaving work and actually taking your LGPS pension. Salary sacrifice AVCs are more tax efficient IF they are available. as Sivertabby has stated you have to take the avc (salary sacrifice or not) with the main scheme to benefit from them being tax free.
has your LGPS got a website explaining AVCs? Might tell you here about the options available regarding salary sacrifice or normal AVCs.

hyubh

Chloe_G said:

Basically I am trying to find out - is there a greater benefit in starting AVCs linked to the LGPS or is a SIPP just as good?

I am 55 and in LGPS.  I will have enough pension to live on comfortably at 67 including full state pension.  I was thinking of starting AVCs linked to LGPS for the tax breaks.  My employer doesn't offer shared AVCs.  (I've discounted APCs.)  However, I am put off by the fact that the AVC sheme wouldn't be paid until I take my LGPS pension.  I will probably stop work before I'm 67 but think I'll be able to put off taking the pension until I am 67 and drawing on the AVC before then may be necessary.

If I start a SIPP now, am I right in thinking I could cash it in at any time if I wanted to and so this would give me more flexibility than an LGPS AVC which I would have no access to until I draw my pension?

Strictly speaking you can cease all AVC contributions and transfer out your AVC alone before taking your main scheme pension. However if you intended to do that, you would have sucked up the negatives of the AVC route (likely restricted fund choices) without enjoying the main benefits (using it on retirement to take tax free cash, or more tax free cash, without avoid commuting scheme pension, or buying additional scheme pension with it at favourable rates).

Will a SIPP still give me the same tax breaks as the LGPS AVCs?  I asked payroll if they do shared AVCs and basically got a curt email back saying No.  Should I ask them if they do salary sacrifice - does that give greater benefits.

In this context, 'shared cost AVC' and 'salary sacrifice' refer to the same thing, looking at it in a different way. A 'shared cost' AVC in the LGPS is simply an AVC that involves an employer contribution. As such it is the mechanism by which salary sacrifice on LGPS AVC contributions is possible: formally everything goes in as an employer contribution, but in reality, the employer isn't paying anything beyond what it would have paid, instead it's the NI savings and your sacrificed salary doing the work.

While an LGPS fund has to offer in house AVC is a requirement under the scheme regulations, they have nothing to say about an in house AVC combined with salary sacrifice specifically. Where the AVC can't be paid into via salary sacrifice, it has essentially the same tax advantages as a SIPP, although very likely in the opposite manner ('relief at source' rather than vs. 'net pay').

MX5huggy

The AVC is the cherry on top on the LGPS, if you can get it via Salary Sacrifice then that’s the gold dusting. I think shared cost is a different name for Salary Sacrifice, but check if they say no then contact your finance director/ local councillors or council cabinet member for finance and ask why they don’t offer it and why they don’t want to save 13.8% employer NI on all AVC contributions. 

I would review your plan to hold out taking the LGPS at 67 the reductions for taking it early are not penalising, just reflecting the earlier payment you don’t “win” taking it later until 82 to 84 ish (because you’re expected to live that long). With the AVC built up you can take that with the LGPS as your tax free lump sum (avoiding taking any optional lump sum which is expensive) and use that to tied you over till State Pension kicks in. 

Im early 40’s putting 1/3 of salary in to AVC via salary Sacrifice I’ll get that LGPS quote on my 55 th birthday and see if I can manage on what it offers till state pension kicks in, there’s lots a variables (stock market performance, inheritance, kids going to uni etc etc) so it might not be possible at 55 but 60 should work out, Dad was dead at 62 which I know is the exception but I’m not staying around a day longer than I need to. 

Nebulous2

Don't discount taking your LGPS at the point you leave work. 

I had built up a pension over a long time and several transfers, some of it with a retirement age of 65 and some with a retirement age of 67.  I left at 59 and took the pension with the actuarial deduction. If you have been in the LGPS all the way through, then you may well have some due at 60 as well. 

Decisions are not always financial. We had a nest egg, for the first time ever, which could have funded me to 65 or 67 without drawing the pension, but I didn't want to spend it. I'd also been working for 40 years and like the reassurance of that monthly payment into my bank account. 

Two years on, I don't regret the decision. Getting a 10.1% rise in my pension this year felt good, especially coming from long-term 1% payrises. 

Silvertabby

Nebulous2 said:

Don't discount taking your LGPS at the point you leave work. 

I had built up a pension over a long time and several transfers, some of it with a retirement age of 65 and some with a retirement age of 67.  I left at 59 and took the pension with the actuarial deduction. If you have been in the LGPS all the way through, then you may well have some due at 60 as well. 

Decisions are not always financial. We had a nest egg, for the first time ever, which could have funded me to 65 or 67 without drawing the pension, but I didn't want to spend it. I'd also been working for 40 years and like the reassurance of that monthly payment into my bank account. 

Two years on, I don't regret the decision. Getting a 10.1% rise in my pension this year felt good, especially coming from long-term 1% payrises. 

Someone with a lot of pre 2014 service may like to consider drawing their deferred benefits from age 65 rather than their planned 67.  Only the post 2014 accruals would be reduced for early payment. 

Chloe_G

Thank you, all, for your advice and expertise.

Chloe_G

So now I've just got to decide between Prudential and Standard Life and which fund  - by the time I decide I'll already be retired!!