AVCs and pension planning

daffodil20

Hi,
I'm looking for advice about how to boost pension/retirement funds.  Getting advice from financial advisers is very difficult when it comes to looking at NHS pension and my employer is unable to provide any recommendations for financial advisers.  I  have 8 years in 1995 section of NHS pension and 4 years in 2015 section (separated by more than 5 years so dealt with as separate pots).  I am 55 years old and plan to work to 65, but may earn less from 60-65.  I currently have a stocks and shares ISA and am saving into that when I can.  I am trying to find out whether it would be wise to buy additional pension or use the AVC option, or just stick to the stocks and shares ISA, or consider any other options I haven't thought of?  I would plan to retire at 65, not 67 (which is my SPA), but I would not draw any pension early.  I would have to fund the 2 years with savings/draw down if I buy AVCs.  

The additional pension option appears to be very expensive - as an example, £1000 of additional pension costs nearly £14,000 if paid over 1 year according to the NHS additional pension calculator.  Would the £14000 actually cost me £11200 due to tax relief?  If so, as my pension would be payable from 67, would it take 11 years from then (until I'm 78) to recoup the money I had paid in? Is there something I could do with that money that would be better over the next 10 years?   I know that annuities are expensive and additional pension is considered to be better value, but I can't seem to work out what the best option is?

With regard to the AVC providers for the NHS, they are Prudential or Standard Life.  I understand Prudential has had a poor reputation recently.  I can see that saving into an AVC is tax efficient in terms of when I save into it, but I cannot see how it is possible to avoid paying tax when withdrawing the money (apart from the 25% that can be taken tax free).  So the 'tax saving' does not seem to be as clear cut, except that I suppose the 'saved tax' is being invested over the next 10 years.  There are numerous options within each AVC to choose from, which I also find confusing.  Prudential has a 'discretionary fund' that is the default option, plus 'lifestyle' options or self-selection.  Standard Life has 'lifestyle options' or self-selection.  I am not confident to self-select.  If I am only going to stay in for about 10 years maximum then I can't see whether the lifestyle options will work?  From what I can see, those plans tend to start switching to safer investments from 10 years before retirement, so I am already there! Is this too short a period of time to grow money in AVCs?  The default prudential option does not appear to have done well against the benchmark over the past few years, but I don't understand that well enough to know whether that should influence my decision.  

Albermarle

A lot of questions. I will try and answer some.

Regarding the payback time for buying additional NHS pension, you are not taking into account that the pension will increase with inflation. This significantly increases the value of the NHS pension, especially as everything is guaranteed.

For  the AVC there is a tax benefit, as you will pay less tax on the way out than tax relief you get on the way in.( due to the 25% tax free)  This is not the case for a S&S ISA. If you are only saving for retirement then pensions are a better way than ISA's.

Regarding which options you might pick within one of the AVC's is probably best kept as a separate subject/ thread, if you decide to go down that route. 

Regarding whether to buy additional nhs pension or add to an avc is not an easy question, and probably best to wait for another poster more well versed in NHS pensions.

dunstonh

Getting advice from financial advisers is very difficult when it comes to looking at NHS pension and my employer is unable to provide any recommendations for financial advisers.

FAs are typically sales reps of their employer (product provider).   IFAs are the type you look for.   However, the employer is not going to recommend any IFAs as the majority of IFA firms are small localised firms of 1-5 advisers dotted all over the country.     

So the 'tax saving' does not seem to be as clear cut, except that I suppose the 'saved tax' is being invested over the next 10 years. 

If you are a basic rate taxpayer during working life (when making contributions) and a basic rate taxpayer in retirement, then pension beats ISA by 6.25% because of better tax positions.  If you are higher rate during working life and basic rate in retirement it is better still.

So, unless you are close to the lifetime allowance (which applies for tax free cash) then pension is likely to be the best option.

Pensions are also outside of the estate and DC pensions are inheritable.


If you are planning an earlier retirement than the state pension and NHS scheme pension age, the benefits of a DC pension over an ISA are far more significant.   If you are planning to stop at NHS scheme age then the added pension can be better value for money unless you are looking for a legacy to pass on or need increased capital provision.

 From what I can see, those plans tend to start switching to safer investments from 10 years before retirement, so I am already there! Is this too short a period of time to grow money in AVCs?

Not safer but less volatile.      it is not too short a time.  However, lifestyling may not be suitable for your objectives.

QrizB

daffodil20 said:

The additional pension option appears to be very expensive - as an example, £1000 of additional pension costs nearly £14,000 if paid over 1 year according to the NHS additional pension calculator. 

£1000 of index-linked pension would cost around £23k if bought on the open market, per the current best buy table at HL. £14k is a bargain.

daffodil20

Thank you all so much for the above replies.  It's really helpful to know that buying additional pension is not as costly as it sounds.  I suppose it seems that way because there is no contribution to it from the NHS employer, so relative to the usual pension scheme, it appears to be expensive.  But that comparison to the open market is really helpful.  I am a basic rate tax payer.  I can see that it may be best to possibly try to buy some additional pension and then maybe also contribute to AVCs via either Standard Life or Prudential so that I have some flexibility about when I take that money out, as I would not be able to get the additional pension until my state pension age.  As I said previously I am not sure how to pick out my investments from the self-select option.  Standard Life only have lifestyle options or self select and apparently Prudential have had very poor customer service and performance in recent times.  I suppose I could opt for lifestyle option in Standard Life but put a retirement age further ahead than I intend and they then won't switch investments to less volatile until later? I really do appreciate the comments from the people who have taken the time to reply.  Thank you very much. 

Marcon

daffodil20 said:

It's really helpful to know that buying additional pension is not as costly as it sounds.  I suppose it seems that way because there is no contribution to it from the NHS employer, so relative to the usual pension scheme, it appears to be expensive.  

Got it in one! I think your comment really drives home just how much employers have to put in (albeit notionally in the case of an unfunded public sector scheme) to provide final salary benefits.

Bear in mind that you don't have to have an AVC to save more for retirement. You could always open a SIPP or other personal pension, and get the same amount of tax relief on contributions, plus greater fund choices and flexibility in how and when you take your benefits from a personal pension.

Albermarle

 I suppose I could opt for lifestyle option in Standard Life but put a retirement age further ahead than I intend and they then won't switch investments to less volatile until later? I

This is one slightly crude option, but it will work. I think the max age you can put in is 75.

Nurse2047

Hi I have a nhs AVC with Pru and recently have found them to be a lot better when I have emailed or needed advice etc I have also additional pension however paused it currently due to currently not affording it as I at the time applied for the full additional pension and should of realised there is no flexibility in that- so now I would need to cancel it or find the money. I wish there was more advice from nhs pension in regards to this when I set it up. 

Choosing my funds with Pru was ok but not in reflection the charges are quite steep in comparison to a SIPP with Vanguard for example. 

JohnWinder

As I said previously I am not sure how to pick out my investments from the self-select option.

numerous options within each AVC to choose from, which I also find confusing.  …  I am not confident to self-select.’

The research suggests there are decent sized benefits from being financially literate, not to the level of Nobel prize in economics but some fundamentals like planning for retirement, avoiding expensive debt and investing in assets like stocks, understanding compounding etc. You're already part of the way there.

30% of retirement wealth inequality can be attributed to financial literacy level - Lusardi A, 2017, J Political Economy.
‘..strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth.’ The Economic Journal, Volume 122, Issue 560, May 2012, Pages 449–478
The Economic Importance of Financial Literacy: Theory and Evidence. Annamaria Lusardi & Olivia S. Mitchell https://www.nber.org/papers/w18952
‘more financially knowledgeable individuals have a higher propensity to detect fraud’ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3308537
So, it’s probably a good investment to work on your financial literacy a bit, given your confession. Hale’s book Smarter Investing, from your local library will bring you along in leaps and bounds.

TARDIS

The 1995 scheme doesn’t increase if you take it late. If you take it later than 60 you’re effectively declining those years’ pension payments for no benefit.

Albermarle

Nurse2047 said:

Hi I have a nhs AVC with Pru and recently have found them to be a lot better when I have emailed or needed advice etc I have also additional pension however paused it currently due to currently not affording it as I at the time applied for the full additional pension and should of realised there is no flexibility in that- so now I would need to cancel it or find the money. I wish there was more advice from nhs pension in regards to this when I set it up. 

Choosing my funds with Pru was ok but not in reflection the charges are quite steep in comparison to a SIPP with Vanguard for example. 

I am a bit surprised the difference is so much. I suppose it depends on what you mean by steep.
A Vanguard retirement fund would cost about 0.4%
Often pension providers like the Pru have a headline price, which is then discounted.