Looking for some AVC & Pension advice

TheMTG

Hi everybody,

For context, I am a 28 year old "community waste operative" for my local council & have been in the position for 2 years now. Currently, due to my salary, my contribution towards my LGPS is set to 5.5%. I am in a stable enough financial position to increase my pension contribution and following contact with the pension team, I was provided the 2 options below.

1) Buy Extra Pension (example given below)

"Kyle is 25 and wants to buy £1,000 additional yearly pension for himself.

He wants to pay the additional contributions he would have to make over 20 years.

The cost of buying £1,000 of additional yearly pension is £52.70 each month for the next 20 years (£12,648 in total)."

2) AVC's through Prudential

-----------------------------------------------------------------------------------------------------------------------------

With regards to savings, I'm financially healthy as a single male & have 5 figures of savings. I have no plans to start a family, buy a car or a house etc..

I also currently have a low 4 figure investment in the S&P 500 which I try and add to each month. From my understanding, the AVC route would be similar with regards to stock/equity investment but the pot can't be touched until retirement age.

I'm of the belief that I could "put away" between £100 - £200 a month out of my monthly wage for the future. Would it be wiser for me to purchase the extra pension or risk it with AVC's through Prudential.

Any advice/further information on the topic would be greatly appreciated. Would be great to hear from anybody who has been in or is currently in my situaiton.
Kind Regards

TheMTG

Forgot to mention, my savings are all in various savings accounts (ISAs, General Savers accounts etc) and they're there to generate interest which I use to reinvest into S&P 500 shares.

dunstonh

TheMTG said:

Forgot to mention, my savings are all in various savings accounts (ISAs, General Savers accounts etc) and they're there to generate interest which I use to reinvest into S&P 500 shares.

Why S&P500?    Is there a good reason or are you just using recency bias? (or rather, not so recent bias, seeing as the US has been significantly underperforming global as of late)

You may have a good reason for that, but on here we often see newbie investors buying into the internet kool aid that life revolves around the S&P500 and nothing else and don't realise that UK investors suffer currency movements and that global vs US historically cycles as to which is best.    The first 12 years of this millennium, the US was the worst, the next 12 years, the US was the best.  YTD US is worse again.  It happens time and again over the generations. Is that the sign of the next switch in the cycle?  It's too early to say, but throwing all your risk-based assets into US equity is a high-risk approach.

Would it be wiser for me to purchase the extra pension or risk it with AVC's through Prudential.

It depends on your objectives.  Both are used in different ways.    £ for £ the additional pension is better if you plan to stick to scheme age.   However, if you want earlier retirement, then the AVC or a SIPP would be better.   A LISA may be too.  Or a combination of options.

SarahB16

TheMTG said:

Hi everybody,

For context, I am a 28 year old "community waste operative" for my local council & have been in the position for 2 years now. Currently, due to my salary, my contribution towards my LGPS is set to 5.5%. I am in a stable enough financial position to increase my pension contribution and following contact with the pension team, I was provided the 2 options below.

1) Buy Extra Pension (example given below)

"Kyle is 25 and wants to buy £1,000 additional yearly pension for himself.

He wants to pay the additional contributions he would have to make over 20 years.

The cost of buying £1,000 of additional yearly pension is £52.70 each month for the next 20 years (£12,648 in total)."

2) AVC's through Prudential

-----------------------------------------------------------------------------------------------------------------------------

With regards to savings, I'm financially healthy as a single male & have 5 figures of savings. I have no plans to start a family, buy a car or a house etc..

I also currently have a low 4 figure investment in the S&P 500 which I try and add to each month. From my understanding, the AVC route would be similar with regards to stock/equity investment but the pot can't be touched until retirement age.

I'm of the belief that I could "put away" between £100 - £200 a month out of my monthly wage for the future. Would it be wiser for me to purchase the extra pension or risk it with AVC's through Prudential.

Any advice/further information on the topic would be greatly appreciated. Would be great to hear from anybody who has been in or is currently in my situaiton.
Kind Regards

An observation I have is that in time it would be sensible to get on the housing ladder (not sure if at some point you would like to do that if you can afford to).  Therefore it would seem sensible to save for a deposit so you could perhaps buy a small house?  Maybe some of your funds are for that purpose in the future?

Alternatively, you run the risk of renting privately in retirement which is not a position many people wish to be in. 

Silvertabby

Buying extra LGPS pension is a good deal if you intend to work to SPA (or defer payment if you leave before that).  Perhaps not so much if you intend to retire early, as your bought pension will be reduced for early payment in the same way as your main scheme benefits.

Most people who take out AVCs do so because of the tax benefits - tax relief in, tax free (within HMRC limits) out.  Plus they are so flexible -  you can start/stop/increase/decrease your payments at will.  Or use some or all of your AVC fund to buy additional fully index linked LGPS benefits.  

Emmia

Given you have no plans to buy a house, where are you living at the moment?

Parents? Renting?

Personally, as your pension arrangements should provide you with a good pension without AVCs I'd probably think about buying somewhere to live, pay off the mortgage and then you don't need to worry about whether your future pension will cover your rent.

ali_bear

It is good that you are thinking about pensions at your age. A lot depends on your life plans and how it actually goes. The only problem with pensions savings is they are locked away until retirement, 30+ years in your case. Having money invested outside of the pension makes sense because you will have the flexibility to use it for other purposes as yet unknown. 

TheMTG

dunstonh said:

TheMTG said:

Forgot to mention, my savings are all in various savings accounts (ISAs, General Savers accounts etc) and they're there to generate interest which I use to reinvest into S&P 500 shares.

Why S&P500?    Is there a good reason or are you just using recency bias? (or rather, not so recent bias, seeing as the US has been significantly underperforming global as of late)

You may have a good reason for that, but on here we often see newbie investors buying into the internet kool aid that life revolves around the S&P500 and nothing else and don't realise that UK investors suffer currency movements and that global vs US historically cycles as to which is best.    The first 12 years of this millennium, the US was the worst, the next 12 years, the US was the best.  YTD US is worse again.  It happens time and again over the generations. Is that the sign of the next switch in the cycle?  It's too early to say, but throwing all your risk-based assets into US equity is a high-risk approach.

Would it be wiser for me to purchase the extra pension or risk it with AVC's through Prudential.

It depends on your objectives.  Both are used in different ways.    £ for £ the additional pension is better if you plan to stick to scheme age.   However, if you want earlier retirement, then the AVC or a SIPP would be better.   A LISA may be too.  Or a combination of options.

Hi there, thank you for your contribution.
I've gone with the S&P 500 purely for the diversification factor & typically it's grown over the last 15 - 20 years and when it has gone down it, there has been a rebound. I understand the investment is risky but for now I'm comfortable having some of my money invested in this manner. There will possibly come a time in which I may look to invest elsewhere but it's more of a gut feeling as of now.
With regards to objectives, I feel good now so would be happy to keep going to the end but who knows how I'll physically/mentally feel in 20/30 years so I'm more just looking best set myself up for any possible outcome really.

TheMTG

SarahB16 said:

TheMTG said:

Hi everybody,

For context, I am a 28 year old "community waste operative" for my local council & have been in the position for 2 years now. Currently, due to my salary, my contribution towards my LGPS is set to 5.5%. I am in a stable enough financial position to increase my pension contribution and following contact with the pension team, I was provided the 2 options below.

1) Buy Extra Pension (example given below)

"Kyle is 25 and wants to buy £1,000 additional yearly pension for himself.

He wants to pay the additional contributions he would have to make over 20 years.

The cost of buying £1,000 of additional yearly pension is £52.70 each month for the next 20 years (£12,648 in total)."

2) AVC's through Prudential

-----------------------------------------------------------------------------------------------------------------------------

With regards to savings, I'm financially healthy as a single male & have 5 figures of savings. I have no plans to start a family, buy a car or a house etc..

I also currently have a low 4 figure investment in the S&P 500 which I try and add to each month. From my understanding, the AVC route would be similar with regards to stock/equity investment but the pot can't be touched until retirement age.

I'm of the belief that I could "put away" between £100 - £200 a month out of my monthly wage for the future. Would it be wiser for me to purchase the extra pension or risk it with AVC's through Prudential.

Any advice/further information on the topic would be greatly appreciated. Would be great to hear from anybody who has been in or is currently in my situaiton.
Kind Regards

An observation I have is that in time it would be sensible to get on the housing ladder (not sure if at some point you would like to do that if you can afford to).  Therefore it would seem sensible to save for a deposit so you could perhaps buy a small house?  Maybe some of your funds are for that purpose in the future?

Alternatively, you run the risk of renting privately in retirement which is not a position many people wish to be in. 

Thanks for the contribution.
Getting on the property ladder is something I have looked into. However, with my savings & current salary I'm outpriced by about £20k-£30k for houses within my area. As of now I'm renting a council property with rent + tax etc at £515 or so a month so financially. In the future, once hopefully partnered up I/we will likely be in a better position to purchase a home then.

TheMTG

Silvertabby said:

Buying extra LGPS pension is a good deal if you intend to work to SPA (or defer payment if you leave before that).  Perhaps not so much if you intend to retire early, as your bought pension will be reduced for early payment in the same way as your main scheme benefits.

Most people who take out AVCs do so because of the tax benefits - tax relief in, tax free (within HMRC limits) out.  Plus they are so flexible -  you can start/stop/increase/decrease your payments at will.  Or use some or all of your AVC fund to buy additional fully index linked LGPS benefits.  

Thanks for the contribution.
For now I inted to work till the end but I've no idea how I'll feel physically/mentally, 20/30 years down the line. 
With regards to AVCs, the tax relief did appeal to me on first look & as does the flexibility but the nature of it occuring via Prudential is a slight worry for me due to volatility of the options provided. Certainly an avenue I'll probably look to explore further.

TheMTG

Emmia said:

Given you have no plans to buy a house, where are you living at the moment?

Parents? Renting?

Personally, as your pension arrangements should provide you with a good pension without AVCs I'd probably think about buying somewhere to live, pay off the mortgage and then you don't need to worry about whether your future pension will cover your rent.

Thanks for your contribution.
Inherited the lease on my council house following my father's passing last year. Rent + tax etc is approx £515 per month with single occupancy so for where I am in life it's comfortable. On the other side to that, property prices where I live have risen a fair bit with me living in a Tourist hotspot & the popularity of Air BnB. Therefore, with a mortage and savings I'm priced out by £20k/£30k typically and I have seen properties selling for sometimes £50k+ over listed price. 
Only position I could see myself purchasing a property would be if I were to have a partner and we bought one together.