Confused about LGPS and AVC's

heterodyne76

I'm trying to read up on additional pension contributions and I've convinced myself it's a bad idea for the type of scheme I'm already in.

I'm in a LGPS which I assume is a defined benefit scheme and from what I've read if I start paying AVC's this is called salary sacrifice. This reduces my gross salary, and therefore my income tax, but it would also reduce my LGPS contributions meaning a smaller LGPS pension pot.

Adding a second pension pot that reduces the first pension pot seems pointless to me - I surely have the wrong end of the stick! Any clarification would be appreciated.

Ebeneezer9

I am in the LGPS and contribute to an AVC via shared cost salary sacrifice and it does not affect the amount paid into my LGPS pension, it remains the same, 6.5% of my annual salary. 

I had the same concerns when I first looked into Sal Sac. 

Sal Sac is the best financial decision I have ever made, if only it was available to me years ago! 

GrumpyDil

As yours is a defined benefit scheme the amount paid in is irrelevant as the amount paid out is guaranteed. The only element which you might need to think about is that salary sacrifice works by reducing your salary and if benefits are calculated based on your salary then that might be an issue but I have no idea about the intricacies of the LGPS scheme.

Incidentally you are right about the impact on contributions for a DC scheme. I am a 40% taxpayer and was thinking about salary sacrifice to reduce my income but my employer also pays slightly more than 20% of my salary into my DC pension. I'm opening a SIPP instead. 

daveyjp

LGPS contributions are paid on gross salary before any salary sacrifice payments are made so you can rest easy.

Similarly any redundancy payments are calculated on your contracted gross salary.

hyubh

heterodyne76 said:

I'm trying to read up on additional pension contributions and I've convinced myself it's a bad idea for the type of scheme I'm already in.

LGPS APCs (= additional DB pension) aren't bad as such, they are a good option. If it looks expensive, it's only because your regular pension is massively subsidised by your employer.

I'm in a LGPS which I assume is a defined benefit scheme

Yes

if I start paying AVC's this is called salary sacrifice

'Salary sacrifice' is a possibility depending on the AVC provider. (What AVC providers are available is not your choice however.) In itself, an LGPS AVC is a DC add-on to an LGPS pension. To fit into scheme rules, formally an AVC done with salary sacrifice is a 'share cost AVC' (SCAVC) in LGPS lingo, since technically salary sacrifice makes your AVC contributions ones from the employer.

This reduces my gross salary, and therefore my income tax,

Yes

 but it would also reduce my LGPS contributions

Incorrect, main scheme contributions are assessed against your pre-sacrificed salary.

meaning a smaller LGPS pension pot

There is no direct connection between your contributions and accrual, though admittedly both are usually derived from a fraction of your (pre-salary sacrifice) pensionable pay.

Albermarle

I'm trying to read up on additional pension contributions and I've convinced myself it's a bad idea for the type of scheme I'm already in

The cost of providing a guaranteed pension income linked to inflation, is often underestimated.

Most private sector companies have stopped these Defined Benefit schemes due to the cost.

sevenhills

Ebeneezer9 said:

I am in the LGPS and contribute to an AVC via shared cost salary sacrifice and it does not affect the amount paid into my LGPS pension, it remains the same, 6.5% of my annual salary. 

What are the costs associated with an AVC, are there charges before/after it is invested?

Silvertabby

OP - you mention APCs (additional pension contributions) and AVCs.  Are you aware that they are not the same thing, or are you considering paying in to both?

AlanP_2

sevenhills said:

Ebeneezer9 said:

I am in the LGPS and contribute to an AVC via shared cost salary sacrifice and it does not affect the amount paid into my LGPS pension, it remains the same, 6.5% of my annual salary. 

What are the costs associated with an AVC, are there charges before/after it is invested?

Yes, there will be, as for most DC pensions. The employer / scheme doesn't pick up the costs but will have negotiated a discount against list prices I am sure.

AlanP_2

GrumpyDil said:

Incidentally you are right about the impact on contributions for a DC scheme. I am a 40% taxpayer and was thinking about salary sacrifice to reduce my income but my employer also pays slightly more than 20% of my salary into my DC pension. I'm opening a SIPP instead. 

I thought most employers / schemes worked on a non-adjusted, pre-sacrifice salary to work out benefits including employer pension contributions.

Are you sure yours takes off any salary sacrifice contribution before they calculate their 20%?

I would have expected the employer contribution just to increase by the amount sacrificed by the employee.

In effect no monetary difference between employer scheme and a SIPP ultimately but you won't benefit from NI saving with a SIPP.

Bue21

If you are being offered salary sacrifice AVCs alongside your LGPS it is a good benefit. Pensionable pay within the LGPS won’t be affected (nor would any redundancy payment) but it is possible that some benefits would - such as maternity pay. I don’t know your circumstances but,if this is likely to be a consideration you can stop contributions and restart them later.  If you are a basic rate taxpayer you only notice a reduction of £70 for every £100 you contribute (after the change in NI in January). Most people are also able to take the whole AVC pot tax free when they take the LGPS pension too (but that depends on how big the pot is relative to your pension - the AVC company can advise you on this.