LGPS AVC vs SIPP

seans_elysees

I currently contribute to an LGPS AVC pension, direct from salary to Prudential. Fees are quite high compared to my other 2 frozen SIPPs from previous employment.  

I’m considering whether it’s in my interest to transfer out of Prudential to one of my legacy SIPPs to take advantage of lower fees. I can then just reset a new AVC account via my HR to start paying into Prudential again. (As the benefit of paying straight from salary is appealing to me) 

Would I be doing anything stupid, or losing anything from taking this approach? I assume that wherever the pot sits, I can take withdrawals at 25% tax free at any point. 

The only thing I think I’d be losing it the option (I don’t intend) to take the entire AVC pot 100% tax free - if taken at the same time as main LGPS DB pot. I don’t think that is a practical reality as I currently would intend to leave the LGPS DB untouched until state retirement age to avoid reductions. Meaning I need AVC/SIPP to fund early retirement. 

Kernowshep

I think you've highlighted the main issue re the 100% tax free vs 25%. Leaving it gives you the option should your circumstances/thoughts change. 

Would your plans still be the same if you were made redundant after age 55 and you get paid your main LGPS pension without reduction?

Also just checking, is it the platform or the investment that has the high fees? If it's the latter then you could look at other options where it is.

I guess it depends how far away you are in money and time from where you want to retire (would the SIPPs grow to be enough to bridge the gap to taking the LGPS in full)?

MX5huggy

You need to run the numbers on taking LGPS early the reductions are cost neutral, ie they just represent the cost of taking it early. To “win” waiting you’ll need to live till 84 ish (which is average) When you consider that you’ll get about £12k state pension at the same time (check your state pension record). Taking the AVC 100% tax free is a big bonus over paying 20% tax on 75% of it. My plan is to take the reduced LGPS early with the AVC lump sum filling the gap until state pension kicks in. 

Laycity

Take the AVC pot entirely tax free, it’s a huge perk that you seem to be overlooking. 

Also look at taking the LGPS early and topping up with a lower amount from your SIPP to give you the income you need. 

seans_elysees

Thank you all for comments so far.  Some things I hadn’t really considered there, so some good food for thought. 

I had previously written off the idea of taking reduced LGPS for retiring early as the % reductions just looked terrifying to me compared to leaving it. I get that there’s obviously a calculation there to be looked into to compare the % reduction vs the benefit of 100% avc tax free. 

I suppose going down that route means that I would be: 

a) Accepting longer term risk on how far my AVC cash can stretch if I live longer. (Compared to knowing I need it for set period, i.e. 58-68). 

b) Requiring tax efficient investment for the AVC pot withdrawn. (as no point withdrawing at 100% tax free to then struggle to keep up with inflation over 20-30 yrs) 

Secret2ndAccount

Another vote for maximising the AVC.
Earn £100. Add £100 to AVC.  Take out £100 tax free.
Earn £100 pay tax and NI; take home £72. Pay £72 into SIPP. Taxman tops it up to £90. Take out £90, pay £13.50 tax, leaving £76.50
£76.50 is a lot less rthan £100
Yes, the early payment reduction is designed to be fair. However, different schemes have different rates of reduction. 4% per year vs 5% per year can make quite a difference. There was discussion on here some time ago about whether the LGPS scheme offered a good or bad rate of reduction. I suggest you search for that and have a read as I can't remember the outcome.

AlanP_2

seans_elysees said:

Thank you all for comments so far.  Some things I hadn’t really considered there, so some good food for thought. 

I had previously written off the idea of taking reduced LGPS for retiring early as the % reductions just looked terrifying to me compared to leaving it. I get that there’s obviously a calculation there to be looked into to compare the % reduction vs the benefit of 100% avc tax free. 

I suppose going down that route means that I would be: 

a) Accepting longer term risk on how far my AVC cash can stretch if I live longer. (Compared to knowing I need it for set period, i.e. 58-68). 

b) Requiring tax efficient investment for the AVC pot withdrawn. (as no point withdrawing at 100% tax free to then struggle to keep up with inflation over 20-30 yrs) 

Why not compromise then if the actuarial reductions are a bid issue for you?

Pay into AVC but use your other pensions when you first retire and start LGPS when they run out, using the AVC to give you access to a reasonable lump sum for big spends or to top up monthly living costs until SP kicks in.

AlanP_2

Are you married / in a relationship as overall financial situation if the family unit comes into play as well?

I withdrew from one of my SIPPs when I retired at an effective 15% tax rate which we used for living expenses so that my wife who was still working could contribute more to her LGPS AVC and get 40% tax relief.

Working together was a lot more efficient financially than working in isolation.

seans_elysees

Kernowshep said:

I think you've highlighted the main issue re the 100% tax free vs 25%. Leaving it gives you the option should your circumstances/thoughts change. 

Would your plans still be the same if you were made redundant after age 55 and you get paid your main LGPS pension without reduction?

I honestly don’t know how redundancy works in public sector and what circumstances can result in additional years contributions, of full early without reduction. I suppose that would be a dream scenario!

Also just checking, is it the platform or the investment that has the high fees? If it's the latter then you could look at other options where it is.

It’s the fund fee. I don’t think there’s a platform fee with Pru. I’m basically paying 0.8% vs 0.43% for similar fund (in my other SIPP)

I guess it depends how far away you are in money and time from where you want to retire (would the SIPPs grow to be enough to bridge the gap to taking the LGPS in full)?

I’m 42. Around £75k in the SIPPs so they might get me part of way, but not all way there. 

Thanks for the reply. 

Just added responses to your specific points. 

seans_elysees

MX5huggy said:

You need to run the numbers on taking LGPS early the reductions are cost neutral, ie they just represent the cost of taking it early. To “win” waiting you’ll need to live till 84 ish (which is average) When you consider that you’ll get about £12k state pension at the same time (check your state pension record). Taking the AVC 100% tax free is a big bonus over paying 20% tax on 75% of it. My plan is to take the reduced LGPS early with the AVC lump sum filling the gap until state pension kicks in. 

Thank you. I’m starting to look at some numbers for this now and probably realising it’s worth considering a change of mindset. My default instinct was that it would be criminal to give up any DB value, but realise from comments that there are other approaches and balance to make it worthy of consideration.

seans_elysees

AlanP_2 said:

seans_elysees said:

Thank you all for comments so far.  Some things I hadn’t really considered there, so some good food for thought. 

I had previously written off the idea of taking reduced LGPS for retiring early as the % reductions just looked terrifying to me compared to leaving it. I get that there’s obviously a calculation there to be looked into to compare the % reduction vs the benefit of 100% avc tax free. 

I suppose going down that route means that I would be: 

a) Accepting longer term risk on how far my AVC cash can stretch if I live longer. (Compared to knowing I need it for set period, i.e. 58-68). 

b) Requiring tax efficient investment for the AVC pot withdrawn. (as no point withdrawing at 100% tax free to then struggle to keep up with inflation over 20-30 yrs) 

Why not compromise then if the actuarial reductions are a bid issue for you?

Pay into AVC but use your other pensions when you first retire and start LGPS when they run out, using the AVC to give you access to a reasonable lump sum for big spends or to top up monthly living costs until SP kicks in.

I think this is probably the balance. 

I have £75k across 2 SIPPs that will hopefully grow and bridge a decent chunk of the gap to retirement. That would minimise the reduction of LGPS required. 

The other factor though is that I imagine it could be possible that my AVC pot could grow to over 25% of combined LGPS/AVC value. So another factor to manage/consider.