LGPS AVC vs SIPP

AlanP_2

seans_elysees said:

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b) Requiring tax efficient investment for the AVC pot withdrawn.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. 

Yes that needs to be managed, for my wife we ended up splitting contributions across AVC and her SIPP to try and maximise tax free amount but if the worst case happens and it grows too high the excess can be used to buy additional annual pension so no great loss.

leosayer

My wife is in LGPS and we decided to setup a SIPP, not AVC.

She will drawdown from the SIPP from age 55 to 59 within her personal allowance so will still pay no income tax.

At age 60 she will commence her LGPS pension with some 85 year protections.

saucer

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. 

I fully agree with this. A lot of people seem not to understand what actuarial reductions are. They aren’t some kind of penalty, but rather a reduction to account for pension being paid for longer. The 100% tax free lump sum is a great benefit, especially if you max it via salary sacrifice. 

nicknameless

saucer said:

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. 

I fully agree with this. A lot of people seem not to understand what actuarial reductions are. They aren’t some kind of penalty, but rather a reduction to account for pension being paid for longer. The 100% tax free lump sum is a great benefit, especially if you max it via salary sacrifice. 

Another potential advantage of taking DB early alongside SIPP or ISA or other source to fund retirement prior to when DB and / or state pension would normally kick in is that you have less demands to draw from those other (non DB) pots and are therefore less prone to sequence of return risk.  Our plan is to take my DB early (5 years) for this exact reason.  All the modelling I have done shows that this increases the probability of a successful draw down plan, even though it is ever so slightly less tax efficient on my count.  We have the added, though hopefully not to be realised, bonus that whilst this reduces the DB in payment it does not affect my partner's survivor benefits from my DB if taken early.

Don't discount the benefits of taking the DB early.

seans_elysees

Slightly different question now for anyone still around...

What do the next steps typically look like after taking the 100% tax free AVC pot?
Say that's approx. £150k, is it basically withdrawn to a bank account?
What then do people typically do to make it stretch 20-30+ years and keep up with inflation to avoid it being eroded, or end up having to pay CGT, etc. ?

QrizB

If you're not going to spend it, you can shift it into ISAs. It'll take a couple offour tax years (£20k each, each year). While it's outside a tax wrapper, you can invest it in a GIA. And keep careful records so you can declare your capital gains etc. each year.

dsw_123

LGPS  like USS and some other private DB schemes with linked AVC schemes have a major advantage that you are perhaps overlooking.  You can use the AVCs to increase the PCLS without impacting the pension in payment.  In the case of USS you can the multiple is 6.67 times the DB in payment (Inclusive of any automatic lump sum) . This means with some foresight and planning you can take all of the AVC pot (assuming it isn't too large) tax free when you put the pension into payment.