PRU's Additional Voluntary Contribution Plan

Chalkie_2

Hi,

My wife has approx. £20,000 invested in a PRU's Additional Voluntary Contribution plan for teachers, to help her with her pension. She is not due to retire for sometime yet, and was looking for some advice on what to do. Should she carry on saving to this plan or switch to a better savings option and reinvest the lump sum?

We would be very greatful for any advice you could give, as we have heard mixed messages about the returns of this plan.

Many thanks

dunstonh

Mod may want to move this to pensions....

AVCs are not the product they used to be. Although from next year, there will be a tax free lump sum available from it and it more or less matches stakeholder/personal pension rules from that point onwards. It will however, still be linked to the occ scheme so it may not be ideal for early retirement.

Charges on in-house AVCs used to be lower than personal pensions or FSAVCs. However, that is often no longer the case. Having a quick look on google for pru's charges and they appear to be higher than alternative plans. However, that may be old material as Pru matched most of their plans to stakeholder charges. It would be something that needs to be looked at to make sure.

When planning for retirement, it often means building up a retirement fund that is in a variety of investments and not just pensions. Occ scheme is great, the AVC contributions are great when there are lots of years to go. It gets less desirable the closer you get to retirement and added years on the occ scheme may be a better. That is usually more expensive from a contribution point of view but the benefits are far greater than an FSAVC is likely to give. Back to AVC, if she is a higher rate tax payer, the 40% tax relief is desirable and if you have children, it may enhance working/childrens tax credits.

Building up some capital in ISAs and other investments is important as well.

The Pru AVC allows you to invest in with profits and unit linked so comments about "the returns of this plan" are pretty useless as you dont know what fund they are talking about. If its stockmarket linked, then you must remember that there was a stockmarket crash a few years back and performance in the short term would have been poor. However, performance since then has been much better and is currently outperforming deposits and property. If its invested in the bog standard cash fund then its not going to make much ever. So, it depends on where its invested. If I was to make a bet, I would say with profits as Pru only had tied agents and they were not allowed to recommend funds and that was the default option. With profits funds have suffered in the short term and have become terminal with some providers. However, Pru is the strongest WP provider out there and although bonuses have dropped over the last few years, Pru did actually increase some this year and that trend is currently likely to continue, providing things remain as they are now.

Chalkie_2

Thanks for your comments dunstonh. It is obvious from reading your post that we don't know enough about the teachers AVC's, and need to find out more. My wife is not yet a higher rate tax payer but is moving that way.

We have capital in ISA's and other investments, I was wondering if a Guaranteed Equity Bond would be an option for the lump sum, then reassess in five years?

Just wondering what to do for the best, like everyone , looking for the best return for our hard earned money. Its a mine field out there:)

Thanks again.

dunstonh

We have capital in ISA's and other investments, I was wondering if a Guaranteed Equity Bond would be an option for the lump sum, then reassess in five years?

GEBs are, to use internet speak, a "noobie" option. Ignoring the fact that they are very profitable to the provider, they will not perform as well as an equity ISA that covers the same index. The only plus point is that they will not drop in value. With much of the stockmarket gains being dividend related (around 3% p.a. average) you do not get those with a GEB. A decently constructed range of funds would usually be better. There is a GEB thread recently in the investments section which gives most of the regulars views. Some are more extreme than others but the consensus is the same.

ReportInvestor

Your AVC plan with the Pru is very likely to be with profits unless you remember requesting anything else, and the charges should be 1% pa.

Personally I don't like with profits, but the Pru WP fund has performed well, and its current financial strength is also good news for the terminal bonus element of your policy. Another bonus, linked to that financial strength, is that that the WP Pru fund will be about 50% in shares/property - giving you prospects of future growth.

With it being WP the full terminal bonus is unlikely to be paid if she transfers to another provider before retirement. (Of course, in the nature of terminal bonuses, they are not guaranteed). The Pru is unusual in adding them to statements (Equitable Life have been criticised for exactly that).

dunstonh wrote:

Occ scheme is great, the AVC contributions are great when there are lots of years to go. It gets less desirable the closer you get to retirement and added years on the occ scheme may be a better.

Added on years ARE much more expensive later. Your school bursar may be able to give you a date beyond which it is not reckoned to be good value for each sex. Your Prudential adviser may also have this information but it is worth cross referencing. The Pru is likely to have sold your wife the original policy on the basis of flexibility rather than better value.

Chalkie wrote:

My wife is not yet a higher rate tax payer but is moving that way.

But if your wife has any promotion prospects / ambitions, that may tip the balance towards occ scheme extra contributions before she moves onto a higher salary on which her final salary pension would be based.

A final thought. Did the adviser who sold the Pru AVC pension to your wife think to mention that it was less good value for women (compared to the occ scheme)? The continued differential between male & female annuities works against women until such time as the EU puts its foot down.

Chalkie_2

Personally I don't like with profits, but the Pru WP fund has performed well, and its current financial strength is also good news for the terminal bonus element of your policy. Another bonus, linked to that financial strength, is that that the WP Pru fund will be about 60% in shares/property - giving you prospects of future growth.

With it being WP the full terminal bonus is unlikely to be paid if she transfers to another provider before retirement. (Of course, in the nature of terminal bonuses, they are not guaranteed). The Pru is unusual in adding them to statements (Equitable Life have been criticised for exactly that).

Should she ask to be moved to another (better performing) fund?

But if your wife has any promotion prospects / ambitions, that may tip the balance towards occ scheme extra contributions before she moves onto a higher salary on which her final salary pension would be based.

Are you saying, it would be a good idea for her to buy extra years, before she is promoted?

Thanks for all your comments help and advise.

ReportInvestor

Chalkie wrote:

Should she ask to be moved to another (better performing) fund?

I'd leave it where it is. The fund does a decent enough job, with quite low charges, and has a wide, balanced spread of investments so that there is the prospect of reasonable performance without all the risks of a pure stockmarket or property fund.

Move to a better performing fund

You need a fairy Godmother (or dh ) for that trick. It can be the investors' unachievable nirvana.

Are you saying, it would be a good idea for her to buy extra years, before she is promoted?

Exactly. It's worth considering after advice. dh may argue that it's better to make pension contributions AFTER she gets promotion and becomes a higher rate tax payer (as there would be 40% tax relief, not 22% on contributions). So it could depend on the nature and scale of her promotion and by how much she will clear the 40% tax rate as a result.

ReportInvestor

Confirmation from Cazalet Consulting that the Prudential With Profits fund has been among the best of its type in recent years