SIPP experts! I'm struggling between LGPS APC and Vanguard SIPP

TerryBiscuits

Hi, I'm nearly 60 and I want to give my pension a final boot up the backside. However I'm not sure what route to take and I'm hoping you geniuses can help...

I'm paying into an LGPS DB scheme which I'm planning to continue as well as maxing out my AVCs before retiring in five years. I will have around £1k a month left for pension contributions and my options are to buy additional LGPS APC contributions, or put it into a Vanguard SIPP.

If I went down the APC route, I would get around £3.5k extra pension at 65. If I put it into a SIPP, assuming 40% tax relief and 5% interest pa, I think I'd end up with a pot of around £97.5k in five years. Using the 4% drawdown rule, that would give me £3.9k pa. The SIPP could also be inherited, whereas the extra APC pension dies with me.

If I've calculated correctly, surely the SIPP makes more sense? Or am I making some rookie mistakes in my calculations? Thanks to anyone who can help!

Dazed_and_C0nfused

TerryBiscuits said:

Hi, I'm nearly 60 and I want to give my pension a final boot up the backside. However I'm not sure what route to take and I'm hoping you geniuses can help...

I'm paying into an LGPS DB scheme which I'm planning to continue as well as maxing out my AVCs before retiring in five years. I will have around £1k a month left for pension contributions and my options are to buy additional LGPS APC contributions, or put it into a Vanguard SIPP.

If I went down the APC route, I would get around £3.5k extra pension at 65. If I put it into a SIPP, assuming 40% tax relief and 5% interest pa, I think I'd end up with a pot of around £97.5k in five years. Using the 4% drawdown rule, that would give me £3.9k pa. The SIPP could also be inherited, whereas the extra APC pension dies with me.

If I've calculated correctly, surely the SIPP makes more sense? Or am I making some rookie mistakes in my calculations? Thanks to anyone who can help!

You do know you only ever get 20% pension tax relief added to personal contributions you add a SIPP?

Any additional tax saving benefits you, it doesn't get added to your pension.  This might mean you can afford to add more in the first place but of you add say £500 then you will only ever get £125 added, making a gross contribution of £625 (the £125 being 20% of the gross contribution).

Also, getting 5% interest in a SIPP is probably a bit of wishful thinking.  Have you considered investing the money?  Your timeframe is short but I doubt 5% is achievable from leaving it as cash (within the pension).

Triumph13

There is a third option which probably beats the SIPP which is LGPS AVCs.  As long as they, pus any existing lump sum, come to less than 25% of (DB x 20 + AVC + lump sum) you can take them all tax free when you take the DB and move them to ISAs over the following years.

That then leaves you to choose between the guaranteed income of APC and the uncertain income you would get from the AVC.

Albermarle

If I've calculated correctly, surely the SIPP makes more sense? Or am I making some rookie mistakes in my calculations?

The issue is that the DB pension will be a guaranteed income with annual uplifts.

Cash in a SIPP is currently earning around 3% ( depends on provider), unless you have it in a STMMF, where it will currently be earning more. However interest rates are trending downwards, so could well be a couple of percent lower in two years time.
If the money in the SIPP was invested, it could return anything from a loss to a big gain, and anything inbetween.

QrizB

Triumph13 said:

There is a third option which probably beats the SIPP which is LGPS AVCs.  

OP does say:

TerryBiscuits said:

I'm paying into an LGPS DB scheme which I'm planning to continue as well as maxing out my AVCs 

... so I think they've thought of that already?

Aren't APCs also taken before tax, so £1k per month into either APC or SIPP is still only £1k per month?

OP the APCs are index linked so the only scope for growth in the SIPP is how much you beat inflation by. Beating inflation by 5% on a SIPP over 5 years is far from guaranteed.

If you assume zero real growth, £1k gross per month for 5 years will give you £60k and 4% drawdown is only £2400 a year.

2% growth will give you £63k, 4% will give £66k, 6% will give £70k. None of these will give you the same SWR-based income that APCs will.

TerryBiscuits

Dazed_and_C0nfused said:

TerryBiscuits said:

Hi, I'm nearly 60 and I want to give my pension a final boot up the backside. However I'm not sure what route to take and I'm hoping you geniuses can help...

I'm paying into an LGPS DB scheme which I'm planning to continue as well as maxing out my AVCs before retiring in five years. I will have around £1k a month left for pension contributions and my options are to buy additional LGPS APC contributions, or put it into a Vanguard SIPP.

If I went down the APC route, I would get around £3.5k extra pension at 65. If I put it into a SIPP, assuming 40% tax relief and 5% interest pa, I think I'd end up with a pot of around £97.5k in five years. Using the 4% drawdown rule, that would give me £3.9k pa. The SIPP could also be inherited, whereas the extra APC pension dies with me.

If I've calculated correctly, surely the SIPP makes more sense? Or am I making some rookie mistakes in my calculations? Thanks to anyone who can help!

You do know you only ever get 20% pension tax relief added to personal contributions you add a SIPP?

Any additional tax saving benefits you, it doesn't get added to your pension.  This might mean you can afford to add more in the first place but of you add say £500 then you will only ever get £125 added, making a gross contribution of £625 (the £125 being 20% of the gross contribution).

Also, getting 5% interest in a SIPP is probably a bit of wishful thinking.  Have you considered investing the money?  Your timeframe is short but I doubt 5% is achievable from leaving it as cash (within the pension).

Thanks. I'd forgotten that any additional relief gets refunded through PAYE, which does make it more of a faff. I'd probably stick it in a global tracker SIPP, so I'll either make more than 5%, or lose 50%!

TerryBiscuits

Triumph13 said:

There is a third option which probably beats the SIPP which is LGPS AVCs.  As long as they, pus any existing lump sum, come to less than 25% of (DB x 20 + AVC + lump sum) you can take them all tax free when you take the DB and move them to ISAs over the following years.

That then leaves you to choose between the guaranteed income of APC and the uncertain income you would get from the AVC.

Great minds think alike! That's my plan before I do anything with any APCs or SIPP. I haven't been in my current job long though, so there's only so much I can get from AVCs.

dunstonh

APC gives certainty but tied in with scheme age.   
SIPP/SHP/PPP etc is not tied in with the scheme and can be useful for funding earlier retirement to the point there is no reduction in the main scheme.

So, it boils down to the objectives.

TerryBiscuits

QrizB said:

Triumph13 said:

There is a third option which probably beats the SIPP which is LGPS AVCs.  

OP does say:

TerryBiscuits said:

I'm paying into an LGPS DB scheme which I'm planning to continue as well as maxing out my AVCs 

... so I think they've thought of that already?

Aren't APCs also taken before tax, so £1k per month into either APC or SIPP is still only £1k per month?

OP the APCs are index linked so the only scope for growth in the SIPP is how much you beat inflation by. Beating inflation by 5% on a SIPP over 5 years is far from guaranteed.

If you assume zero real growth, £1k gross per month for 5 years will give you £60k and 4% drawdown is only £2400 a year.

2% growth will give you £63k, 4% will give £66k, 6% will give £70k. None of these will give you the same SWR-based income that APCs will.

Now that does paint a compelling picture for APCs. Thanks for the clarity. 

TerryBiscuits

dunstonh said:

APC gives certainty but tied in with scheme age.   
SIPP/SHP/PPP etc is not tied in with the scheme and can be useful for funding earlier retirement to the point there is no reduction in the main scheme.

So, it boils down to the objectives.

Are you referring to the flexibility of being able to access as much or little of the SIPP as and when I wish? If so, that is certainly something to consider, as one thing you can guarantee about the future is that nothing's guaranteed.

dunstonh

TerryBiscuits said:

dunstonh said:

APC gives certainty but tied in with scheme age.   
SIPP/SHP/PPP etc is not tied in with the scheme and can be useful for funding earlier retirement to the point there is no reduction in the main scheme.

So, it boils down to the objectives.

Are you referring to the flexibility of being able to access as much or little of the SIPP as and when I wish? If so, that is certainly something to consider, as one thing you can guarantee about the future is that nothing's guaranteed.

Yes.   If you plan earlier than scheme age retirement, then you will be looking to fund the gap to the point some  your LGPS is accessible has no reduction due to early access.

Effectively, you have to compare taking the reduction vs accessing the personal pension and decide which is best.