Teacher AVCs, long term Stock & Shares ISA investing, and independent financial advice.

AlanP_2

I'm not a teacher so don't know the scheme you are in but I was in the local gov scheme and used AVCs.

Mine could be used to fund the complete tax free amount so I got tax relief on contributions and withdrew with zero tax.

This was better than a SIPP where only 25% would be tax free giving an effective withdrawal tax rate of 15%.

If the teacher's scheme operates like a SIPP in that respect then I can't see any benefit to using it and would use a lower cost SIPP instead.

BTW - there will no doubt be a discount against that listed Pru charge negotiated by the scheme. Also the Pru charge will be 1 number, a SIPP fund has 2 charges - the platform and the fund - which need to be allowed for in your calculations.

typeractive

LHW99 said:

With your Teacher's pension, could you look at buying "Added Years", in comparison with AVCs?

Thank you @Lwh99, I haven't considered this. I am unsure if possible but if so it might be a good idea? Assuming it also avoids the tax, and tops into my existing pot? If possible I'm sure there will no doubt be some form of fee / charge along the line? 

typeractive

AlanP_2 said:

I'm not a teacher so don't know the scheme you are in but I was in the local gov scheme and used AVCs.

Mine could be used to fund the complete tax free amount so I got tax relief on contributions and withdrew with zero tax.

This was better than a SIPP where only 25% would be tax free giving an effective withdrawal tax rate of 15%.

If the teacher's scheme operates like a SIPP in that respect then I can't see any benefit to using it and would use a lower cost SIPP instead.

BTW - there will no doubt be a discount against that listed Pru charge negotiated by the scheme. Also the Pru charge will be 1 number, a SIPP fund has 2 charges - the platform and the fund - which need to be allowed for in your calculations.

Thanks @AlanP_2. That sounds like it worked out really great for you!

My knowledge at the moment of the AVC is that 25% is tax free, and the drawdown will be taxable (but hopefully at a lower rate if I pursue this option). I think Teacher Pension does operate like that.

Do you mean possible to negotiate a discount, or do you mean it will already be discounted? The fees I quoted in the example were the 'total fee's'. I don't have the factsheet to hand in front of me at the moment to break these down but to my knowledge I had included everything into my calcs. Thanks for the help!

AlanP_2

The teacher's scheme will have negotiated a discount against standard Pru listed prices. It might be tricky to find out the details until you are signed up with them. Is there anything on teacher's scheme website or contact details of their Pru contacts to ask?

But, as per my original point, if the AVC is treated no differently than a SIPP why use it?

typeractive

AlanP_2 said:

The teacher's scheme will have negotiated a discount against standard Pru listed prices. It might be tricky to find out the details until you are signed up with them. Is there anything on teacher's scheme website or contact details of their Pru contacts to ask?

But, as per my original point, if the AVC is treated no differently than a SIPP why use it?

Yes, on the Teacher Pension page there is a page regarding AVC's, and they direct people towards the Pru with a caveat that they are not the only option. So maybe I need to shop more broadly and consider SIPP's over the pru offering? (I'm learning as everyone can probably identify!). Thanks for helping  

dunstonh

How do you do the multi quote? I can't figure out the code for that

Its a manual process.  You copy and paste the text you want to quote.  Select that text and press the quote button.   You can then type underneath it and repeat for the bits you are referring to.

OK I need a little bit of help here or to look into this more. I thought this Vanguard product is a global index fund? If not could you point me towards some examples (not taken as financial advice).

VLS100 is not a global index fund.  Its a managed fettered fund of funds.     Fund of funds are a fund that invests in other funds.    Most of the VLS range has around 18 underlying funds.   VLS100 has less as there are no underlying bond funds.    It is managed because Vanguard make management decisions on the funds held in the VLS fund and the amount the allocated to each one.    One notable management decision is that they are heavy in UK.   That is known as home bias.     

An index tracker will be a single fund tracking a particular benchmark.  No management decisions involved. Although there will be some variations between trackers from different fund houses as to how they track. That can lead to variances in the return of trackers covering the same index/benchmark.        No one fund house has the best trackers in all areas.  


Indeed I could lump 100%, or I could dollar cost average it across over time? That's something I was considering if possible. Either a period of a year / 2/3/4 years transferring whilst putting in my monthly allowance?
Sometimes multi-quoting plays up and you cant use it in reply.  That is what is happening now...

Pound cost averaging is an option but statistically, you are more likely to end up with a lower return than if you invested when you had the money.   However, if your plan is only to do regular contributions out of regular income, then its not an issue.

As we've talked risk in here, the Prudential Fixed Interest S3 has returned an average of -3.62% over the last 4 years, with 0.66% fees added on top. In my calculations it actually still beats Saving with a 0% interest rate after tax (which is amazing when you think of it), but if that rate drops to say -4% then my after tax take home saves would technically be better off. I hope it wouldn't perform at this level for 20 years, but theoretically is this possible when we're talking about risk? It should be noted that product is one of their lower risk ones. It's largely constructed of UK bonds, so maybe they will hit a maturity later so my point could be pointless. Just thought it was worth asking.

Pru fixed interest invests in fixed interest securities.   They have just come off their worst period in over 100 years.  They suffered two events in quick succession that hit them hard.     However, the following bits you need to note.
a) the returns are quoted after fund charges.  Not before.  So, you don't need to deduct the charge again.  This differs from unit trust/oecis on a platform where the fund charge is deducted in the same way but the platform charge is deducted externally. 
b) A similar 100 year event that happened with gilts will happen with equities.   When is unknown.  Statistically you have to be unlucky but some will not be.
c) you wouldn't be looking at Pru fixed interest fund in your fund selection.  
d) fixed interest security funds are just funds that hold bonds and gilts.  It doesnt mature.    They have far less volatility than equities 95% of the time.   A gilts crash is considered 5%+ whereas an equities crash at 20%+

So is this a good thing, or an indifference? i.e. it is what it is?

AVCs are legacy products that are still being retailed when their PPP (personal pension plan) equivalent has long been put to bed.     As most schemes no longer offer AVCs, there hasn't been much in the way of product development on them.   They don't have the same functionality as modern plans and whilst AVCs were cheaper than PPPs or SIPPs in 2006, AVCs are typically around twice the cost of modern PPPs/SIPPs.      Your AVC at 0.66% compares to SIPPs at around 0.3x%.  A SIPP will typically have all drawdown methods available.  The AVC will only have a few.  (drawdown options are not important at your stage.  You can always move it later).

However, some AVCs offer advantages that cannot be matched by a SIPP/PPP.    Some schemes allow the tax free cash on the main scheme to be diverted to the AVC allowing the higher income to be taken from the main scheme.  That can be valuable.     Some will pay into the AVC using salary sacrifice, so you save on NI as well as tax.   

Where an AVC has neither of those benefits and is twice the cost of individual retail pensions (SIPPS/PPPs), then its usually better to not use the AVC.   Where they do have those benefits, then using the AVC has to be considered.

You probably wont need one in your scenario.  I think you will get what you need from here.

typeractive

Its a manual process.  You copy and paste the text you want to quote.  Select that text and press the quote button.   You can then type underneath it and repeat for the bits you are referring to.

Got it. I used to know how to do this with the code on forums, and have just cracked it if you want me to share it? When I first tried yesterday it made some very funny quotes in quotes. So I am using note pad to copy and paste and then wrap it in the codes - let's see what happens!

VLS100 is not a global index fund. Its a managed fettered fund of funds. Fund of funds are a fund that invests in other funds. Most of the VLS range has around 18 underlying funds. VLS100 has less as there are no underlying bond funds. It is managed because Vanguard make management decisions on the funds held in the VLS fund and the amount the allocated to each one. One notable management decision is that they are heavy in UK. That is known as home bias.

Right I need to learn more here. I know the fund has lots of other funds in it. I actually downloaded the breakdown list to look at the companies, asset types, location and so forth, and then compared that to some other funds to see similar companies and so forth. I'm sure people can look and find more information but it was a start.

The 4 largest funds in this one are:
U.S. Equity Index Fund GBP Acc 19.50% FTSE Developed World ex-U.K. Equity Index Fund GBP Acc 19.38% FTSE U.K. All Share Index Unit Trust GBP Acc 19.37% S&P 500 UCITS ETF (USD) Accumulating 17.15%

Is this a heavy home bias, as it looks heavier to the US economy. But perhaps you mean something else? Am I being too literal?

I also think I'm getting muddled up with 'managed' and not managed. On the VG website there are options for managed and DIY or ready made. I just tried going through the 'build your own' and I picked equities, global, index. The most appealing here is the FTSE Global All Cap Index. A quick look and it is also heavily based on US equities. The fees for this are 0.23% so pretty similar to what I was looking at previously. I feel the fund of fund will have more diversity in it but I have not compared properly. Am I considering this correctly?

Pound cost averaging is an option but statistically, you are more likely to end up with a lower return than if you invested when you had the money. However, if your plan is only to do regular contributions out of regular income, then its not an issue.

So when you asked were you checking to see if I was aware of the risk and looking out for my safety, as the stats suggest what you say. That said, I don't mind long term price cost averaging. I basically planned to move (in whatever capacity: lump or PCA) my cash ISA into S&S, and then make maximum regular contributions. I guess I could keep a % in cash ISA and just let that sit in case it all goes horribly wrong...but I'll have less to build up that momentum.

Pru fixed interest invests in fixed interest securities. They have just come off their worst period in over 100 years. They suffered two events in quick succession that hit them hard. However, the following bits you need to note. a) the returns are quoted after fund charges. Not before. So, you don't need to deduct the charge again. This differs from unit trust/oecis on a platform where the fund charge is deducted in the same way but the platform charge is deducted externally. b) A similar 100 year event that happened with gilts will happen with equities. When is unknown. Statistically you have to be unlucky but some will not be. c) you wouldn't be looking at Pru fixed interest fund in your fund selection. d) fixed interest security funds are just funds that hold bonds and gilts. It doesnt mature. They have far less volatility than equities 95% of the time. A gilts crash is considered 5%+ whereas an equities crash at 20%+

Eeeeek - just when I am looking to get involved...could be a blessing I was never in before...or this could continue. Do we know the reason for the worst performance? Any correlation to good Stock growth?

Handy to know about the returns after fees applied - thank you.

I understand what you're saying about the luck happening to equities.

Just to check on the 'wouldn't look for a pru fixed interest fund'...well I'm considering any. If I can pick a safe investment for the AVC that would support my contribution to outperform say a 5% Stock performance (over 20 years average just for example) then I would opt for that on the safety, so I don't mind it being lower rate. We can get into a huge debate of that 5% number as we could pick any number really and nobody knows either way. It's all speculation. What I'm trying to say is: if I can find a 'lesser risk' model for the AVC that could produce a similar return over a long period of time than a modest Stock return - i'd pick it for the lower risk. My S&S ISA will weather the more riskier investment. This way I am attempting to have good exposure across various assets, with a mixture of risk control....to the best of my abilities at this point in time. As we have witnessed the medium and low risks are still vulnerable and past performance doesn't indicate future returns.

However, some AVCs offer advantages that cannot be matched by a SIPP/PPP. Some schemes allow the tax free cash on the main scheme to be diverted to the AVC allowing the higher income to be taken from the main scheme. That can be valuable. Some will pay into the AVC using salary sacrifice, so you save on NI as well as tax.

This is great to hear, and it is more and more detail. But for the average Joe like me it feels a lot to digest. I'm a bit unsure what and who exactly I need to ask and then to compare against the more modern counterparts

You probably wont need one in your scenario. I think you will get what you need from here.

As the multiquote on your post has messed up, I am guessing this is in regards to my question of needing an IFA...which, if it is, then I take that as a really nice thing for you to say (thank you!), but....for the AVC's, I actually think I maybe do need someone...and for the ISA.

I always like to say thanks to the kind people that try to help one another, but in particular Dunstonh I have been looking forward to reading your reply (though no comment on my Bitcoin joke? lol). I know you're an IFA, and you are kindly helping folk like me for free on here to make considerations, but if we wanted to have your help and pay for more support is that possible? I mean surely we just need to find you in the FCA website. Just for anyone reading, I've been a member here for a long time and I'm openly asking. I just want someone knowledgeable to go over my plans, help with suggestions but not take an annual fee. Maybe i'm a bit MSE ambitious in my thoughts. I also want to consider life insurance, critical illness / income protection and all these other grown up things.