Prudential AVC fund options

Aylesbury_Duck

I’ve been building a Prudential AVC plan alongside my LGPS, with the intention to take the maximum TFLS when I commence drawing the LGPS and use the rest to buy additional LGPS pension. The fund value is currently £156k and I’m continuing to add £2k a month to it.  It’s currently invested as follows:

               £93k in global international equity funds (med to high risk)

               £63k with profits cash accumulation

Plan value is £167k which I believe is because there’s an estimate of the with-profits bonus.  All new contributions go into the equity funds.

The plan has done nicely since I switched from the default investments some years ago.  I intend to retire at 57, using savings and some of my DC pensions from that point, and then commence the LGPS at some point between 62 and 67 years of age, using the excess AVC above the 100% TFLS limit to buy extra LGPS pension.

I’m currently 52, so am 10-15 years from accessing the AVC and so I’m looking at the risk profile and considering making my gains a little more secure.  Pru offers a DIY fund choice and a lifestyling option.  Having read through the fund booklet, I could select options like their Dynamic Growth IV and V funds, which have equity amounts of 40-80% and 60-100% respectively and re-assess in a few years’ time, or go for one of their lifestyle options and let them gradually rebalance over time.

When it comes to the lifestyling options, I’m unsure which is the one to go for, and which retirement age to select.  The selected retirement age is currently 67.  Should I retain that, consider moving it to 62 (the earliest I might access the plan) or pick something in the middle?  62 would trigger the most conservative lifestyle profiling, being only 10 years away, but if I did elect to postpone access, I will have missed out on possibly better growth.  Instinct tells me I should leave it at 67, but I’d be glad to hear others’ opinions.

Their lifestyling options are these:

‘targeting retirement options’ for those that aren’t sure how they might want to access their pension savings

‘targeting annuity’

‘targeting cash’ for those intending to take their pension as a single or series of cash lump sums

‘targeting drawdown’ for those intending to keep their pension fund invested after retirement

Targeting annuity seems the logical choice, given that I want to max out the TFLS and use the rest to buy an ‘annuity’ in the shape of index-linked LGPS pension.  The drawback is that it leads to a pretty ‘hard stop’ in that all the investments would be in bonds and cash in the last two years, so picking the retirement date now seems very important, and I’m still not sure on that.  The other option that looks viable is targeting retirement options.  That profiles the investments down to an end-point of 25% cash and the rest in low-medium risk 10-40% equities.  Gives me more flexibility given the uncertainty over the precise retirement date.  Again, grateful for other people’s opinions.

SarahB16

Aylesbury_Duck said:

I’ve been building a Prudential AVC plan alongside my LGPS, with the intention to take the maximum TFLS when I commence drawing the LGPS and use the rest to buy additional LGPS pension. The fund value is currently £156k and I’m continuing to add £2k a month to it.  It’s currently invested as follows:

               £93k in global international equity funds (med to high risk)

               £63k with profits cash accumulation

Plan value is £167k which I believe is because there’s an estimate of the with-profits bonus.  All new contributions go into the equity funds.

The plan has done nicely since I switched from the default investments some years ago.  I intend to retire at 57, using savings and some of my DC pensions from that point, and then commence the LGPS at some point between 62 and 67 years of age, using the excess AVC above the 100% TFLS limit to buy extra LGPS pension.

I’m currently 52, so am 10-15 years from accessing the AVC and so I’m looking at the risk profile and considering making my gains a little more secure.  Pru offers a DIY fund choice and a lifestyling option.  Having read through the fund booklet, I could select options like their Dynamic Growth IV and V funds, which have equity amounts of 40-80% and 60-100% respectively and re-assess in a few years’ time, or go for one of their lifestyle options and let them gradually rebalance over time.

When it comes to the lifestyling options, I’m unsure which is the one to go for, and which retirement age to select.  The selected retirement age is currently 67.  Should I retain that, consider moving it to 62 (the earliest I might access the plan) or pick something in the middle?  62 would trigger the most conservative lifestyle profiling, being only 10 years away, but if I did elect to postpone access, I will have missed out on possibly better growth.  Instinct tells me I should leave it at 67, but I’d be glad to hear others’ opinions.

Their lifestyling options are these:

‘targeting retirement options’ for those that aren’t sure how they might want to access their pension savings

‘targeting annuity’

‘targeting cash’ for those intending to take their pension as a single or series of cash lump sums

‘targeting drawdown’ for those intending to keep their pension fund invested after retirement

Targeting annuity seems the logical choice, given that I want to max out the TFLS and use the rest to buy an ‘annuity’ in the shape of index-linked LGPS pension.  The drawback is that it leads to a pretty ‘hard stop’ in that all the investments would be in bonds and cash in the last two years, so picking the retirement date now seems very important, and I’m still not sure on that.  The other option that looks viable is targeting retirement options.  That profiles the investments down to an end-point of 25% cash and the rest in low-medium risk 10-40% equities.  Gives me more flexibility given the uncertainty over the precise retirement date.  Again, grateful for other people’s opinions.

A few observations if I may:

1.) If I were you I would take all of your DC pot before you commence drawing your LGPS pension.  This would mean you could take your LGPS pension later and therefore a lower actuarial reduction.  

2.) Regarding your fund choice.  It seems that you can continue to select the funds you want and you don't need to select a 'lifestyling option'.  The 'lifestyling option' would appear to be for the passive investors who are happy to let the Pru select the funds and they select lower risk funds as you get nearer to the retirement age you have selected.  My LGPS AVC provider does not use the Pru so somebody else may be able to provide further information on my second point.

I have a small choice of funds that my LGPS AVC can invest in and with each is a supporting fund sheet showing its performance and its benchmark index and the risk category.  Perhaps as you get older and are nearing retirement select the different funds that you wish to invest in.  

Lastly, have you considered reducing how much you pay into your AVC each month and instead put some of that money into topping up the DC pot?  You could then use the DC pot to support you for longer and therefore commence drawing your LGPS pension later too.  The benefits of the additional LGPS pension from the excess AVC pot that exceeds the TFLS will be significantly reduced by drawing it many years before the NRA so you may be better funding those years with additional DC funds and take your LGPS pension later.  I know there are NIC savings from paying into the LGPS AVC but surely all those saving will be outweighed by the significant actuarial reductions that you will be hit with.  

Aylesbury_Duck

SarahB16 said:

Aylesbury_Duck said:

I’ve been building a Prudential AVC plan alongside my LGPS, with the intention to take the maximum TFLS when I commence drawing the LGPS and use the rest to buy additional LGPS pension. The fund value is currently £156k and I’m continuing to add £2k a month to it.  It’s currently invested as follows:

               £93k in global international equity funds (med to high risk)

               £63k with profits cash accumulation

Plan value is £167k which I believe is because there’s an estimate of the with-profits bonus.  All new contributions go into the equity funds.

The plan has done nicely since I switched from the default investments some years ago.  I intend to retire at 57, using savings and some of my DC pensions from that point, and then commence the LGPS at some point between 62 and 67 years of age, using the excess AVC above the 100% TFLS limit to buy extra LGPS pension.

I’m currently 52, so am 10-15 years from accessing the AVC and so I’m looking at the risk profile and considering making my gains a little more secure.  Pru offers a DIY fund choice and a lifestyling option.  Having read through the fund booklet, I could select options like their Dynamic Growth IV and V funds, which have equity amounts of 40-80% and 60-100% respectively and re-assess in a few years’ time, or go for one of their lifestyle options and let them gradually rebalance over time.

When it comes to the lifestyling options, I’m unsure which is the one to go for, and which retirement age to select.  The selected retirement age is currently 67.  Should I retain that, consider moving it to 62 (the earliest I might access the plan) or pick something in the middle?  62 would trigger the most conservative lifestyle profiling, being only 10 years away, but if I did elect to postpone access, I will have missed out on possibly better growth.  Instinct tells me I should leave it at 67, but I’d be glad to hear others’ opinions.

Their lifestyling options are these:

‘targeting retirement options’ for those that aren’t sure how they might want to access their pension savings

‘targeting annuity’

‘targeting cash’ for those intending to take their pension as a single or series of cash lump sums

‘targeting drawdown’ for those intending to keep their pension fund invested after retirement

Targeting annuity seems the logical choice, given that I want to max out the TFLS and use the rest to buy an ‘annuity’ in the shape of index-linked LGPS pension.  The drawback is that it leads to a pretty ‘hard stop’ in that all the investments would be in bonds and cash in the last two years, so picking the retirement date now seems very important, and I’m still not sure on that.  The other option that looks viable is targeting retirement options.  That profiles the investments down to an end-point of 25% cash and the rest in low-medium risk 10-40% equities.  Gives me more flexibility given the uncertainty over the precise retirement date.  Again, grateful for other people’s opinions.

A few observations if I may:

1.) If I were you I would take all of your DC pot before you commence drawing your LGPS pension.  This would mean you could take your LGPS pension later and therefore a lower actuarial reduction.  

2.) Regarding your fund choice.  It seems that you can continue to select the funds you want and you don't need to select a 'lifestyling option'.  The 'lifestyling option' would appear to be for the passive investors who are happy to let the Pru select the funds and they select lower risk funds as you get nearer to the retirement age you have selected.  My LGPS AVC provider does not use the Pru so somebody else may be able to provide further information on my second point.

I have a small choice of funds that my LGPS AVC can invest in and with each is a supporting fund sheet showing its performance and its benchmark index and the risk category.  Perhaps as you get older and are nearing retirement select the different funds that you wish to invest in.  

Lastly, have you considered reducing how much you pay into your AVC each month and instead put some of that money into topping up the DC pot?  You could then use the DC pot to support you for longer and therefore commence drawing your LGPS pension later too.  The benefits of the additional LGPS pension from the excess AVC pot that exceeds the TFLS will be significantly reduced by drawing it many years before the NRA so you may be better funding those years with additional DC funds and take your LGPS pension later.  I know there are NIC savings from paying into the LGPS AVC but surely all those saving will be outweighed by the significant actuarial reductions that you will be hit with.  

Thank you, really valuable input.

Yes, if I continue to add to my DC pots then you're right that it's best to leave my LGPS and AVC until 67 to maximise their value.  This year I am putting a lot into the AVC because it will be an extraordinary year for my income and I am using the AVC deductions to minimise HRT this year, plus some SIPP contributions, using all of the £60k allowance (I have no carry-over from the last three years).  The opportunity to get a big chunk of the AVC back tax-free having saved 40% tax on the way in seems an excellent one, but as you suggest, I need to make sure I have sufficient savings and DCs to cover me from 57 to 67.  No point having to live frugally for what will probably be the most active 10 years of retirement and then having more income from 67 when the pace of life may be a little slower.  From April, I had planned to do as you suggest, cool the AVC contributions and put more into my SIPP.  

Thank you for the comments on lifestyling vs DIY, too.  Plenty to think about.  My wife also has an LGPS-linked AVC so we need to consider the same for her.  If we're able to leave the LGPS and AVCs untouched until 67 then my AVC fund choices can remain a little more ambitious for a few more years.  They may be best left where they are for now.

As an aside to the financial choices, I am realising that one of the biggest challenges we will face is the psychological one of moving from 35 years of careful saving and accumulating money, to (hopefully) another 35 years of spending and seeing our wealth diminish by the month!  

Albermarle

As an aside to the financial choices, I am realising that one of the biggest challenges we will face is the psychological one of moving from 35 years of careful saving and accumulating money, to (hopefully) another 35 years of spending and seeing our wealth diminish by the month!  

A common issue on this board !
However with a DB pension and then state pension , you will hopefully find your visible assets do not decline very much.
Also in your OP there is no mention of a 'we', but it seems that there is.
Presume your partner will have at least a state pension and maybe other assets ? You should look at your finances jointly, rather than individually.

Aylesbury_Duck

Albermarle said:

As an aside to the financial choices, I am realising that one of the biggest challenges we will face is the psychological one of moving from 35 years of careful saving and accumulating money, to (hopefully) another 35 years of spending and seeing our wealth diminish by the month!  

A common issue on this board !
However with a DB pension and then state pension , you will hopefully find your visible assets do not decline very much.
Also in your OP there is no mention of a 'we', but it seems that there is.
Presume your partner will have at least a state pension and maybe other assets ? You should look at your finances jointly, rather than individually.

Yes, I didn't want to complicate matters with my AVC options but yes, my wife has a modest SIPP, an LGPS entitlement of £10k and growing, another small DB pension and a growing AVC pot.  We're adding to her SIPP at the moment to give that a boost.  Both of us will have full state pension from 67.