LGPS AVCs, worth the higher fees & lack of fund choice for the tax free lump sum on exit?

ftbwannabe

Hello, I think I've decided to start saving into my LGPS AVC option with the Prudential instead of into my SIPP, because my pension scheme allows me to take that AVC pot tax free when I retire. But I'd love to sense check this with someone else, please?

In a nutshell: since I can take all of it tax free when I retire, it would have to perform 20%* worse than any other option to make it not my best choice, right?
(*I'm not a high earner & don't plan to change jobs so 20%= tax for me. This isn't a salary sacrifice scheme, so no NI reduction).

I wouldn't choose any of the Pru options under normal circumstances as they are almost all active funds and none are 100% equities. In my current SIPP I'm saving into the Vanguard FTSE Global All Cap, which I chose because it's diverse, passive & has low fees (0.23%). The closest I can get with the Pru is the Prudential S3 Overseas Equity Index which is 89% equities that are less diverse and fees of 0.58%. There is only 1 other passive fund but that's UK equities only and I want to be invested globally. So, I think the funds in my SIPP will perform better - but as they'd be taxed and the AVC pot won't be, so as long as they don't outperform this pru fund by more than 20%, I'd actually not be better off. I think?

There is a limit on the amount I can take tax free (25% of my total LGPS pension value) but I won't exceed it (I'm planning to retire in 8 years and am not a high earner, so I'm fairly confident about the max I'd be able to save between now & then and it won't reach that much).

Any insight gratefully received!

El_Torro

Your reasoning sounds about right. If you can access all your AVCs tax free then it's difficult to envisage a scenario where you're better of paying into a SIPP. 

One benefit of a SIPP is that you can access the money at either 55 or 57, depending on how old you are now. The LGPS tax free AVC needs to be accessed when you access the rest of your pension. If you're clear on when you are going to retire and access your funds then this isn't such a big benefit for the SIPP. 

Your Prudential fund option doesn't sound too terrible. The management fee is a bit high, yes, but I wouldn't worry too much about the 89% in equities, it won't perform that differently to a fund that is 100% equities. Without seeing the factsheet I can't say whether this fund's reduced diversification is a problem or not.

DRS1

Does your 20% calculation factor in that 25% of the SIPP can be taken tax free (at the moment)?
Also you assume that you will pay 20% on the taxable portion of the SIPP but won't that depend on how much other income you have at the time?  Is it possible you may be able to draw "taxable" income from the SIPP at a time when your tax rate is less than 20% - eg because you have some personal allowance available.

That is not to say that the LGPS AVC lump sum calculation isn't very attractive - it is.  Just that the margin for underperformance may not be as high as you suggest.

Aylesbury_Duck

I have hammered away at the AVC for the last six years because of the tax free element and the ability to buy additional LGPS pension with the remainder.  For me, it means I could commence my LGPS sooner than at 67, getting the full TFLS from the AVC and pretty much restoring the LGPS to what it would pay me at 67.  That's a good option for my circumstances and outweighs the limited fund choice and the fees.

I am cooling down contributions now, diverting new money into my SIPP so I can use it and other DC pots to fund retirement ahead of drawing the LGPS.  My AVC is currently worth 37% of my LGPS+AVC value, so there is currently quite a large residual sum with which to buy additional LGPS pension, but that percentage will start to drop as the LGPS value continues to rise.  I could of course drawdown that excess instead.  I'll decide nearer the time.  

daveyjp

You should also be pressing your employer to go salary sacrifice for AVCs. 

ftbwannabe

DRS1 said:

Does your 20% calculation factor in that 25% of the SIPP can be taken tax free (at the moment)?
Also you assume that you will pay 20% on the taxable portion of the SIPP but won't that depend on how much other income you have at the time?  Is it possible you may be able to draw "taxable" income from the SIPP at a time when your tax rate is less than 20% - eg because you have some personal allowance available.

That is not to say that the LGPS AVC lump sum calculation isn't very attractive - it is.  Just that the margin for underperformance may not be as high as you suggest.

'the margin for underperformance may not be as high as you suggest' is a really good point, thank you!

ftbwannabe

El_Torro said:

Your reasoning sounds about right. If you can access all your AVCs tax free then it's difficult to envisage a scenario where you're better of paying into a SIPP. 

One benefit of a SIPP is that you can access the money at either 55 or 57, depending on how old you are now. The LGPS tax free AVC needs to be accessed when you access the rest of your pension. If you're clear on when you are going to retire and access your funds then this isn't such a big benefit for the SIPP. 

Your Prudential fund option doesn't sound too terrible. The management fee is a bit high, yes, but I wouldn't worry too much about the 89% in equities, it won't perform that differently to a fund that is 100% equities. Without seeing the factsheet I can't say whether this fund's reduced diversification is a problem or not.

Thank you, it's reassuring that my reasoning sounds about right to someone other than me :-)

ftbwannabe

Aylesbury_Duck said:

I have hammered away at the AVC for the last six years because of the tax free element and the ability to buy additional LGPS pension with the remainder.  For me, it means I could commence my LGPS sooner than at 67, getting the full TFLS from the AVC and pretty much restoring the LGPS to what it would pay me at 67.  That's a good option for my circumstances and outweighs the limited fund choice and the fees.

I am cooling down contributions now, diverting new money into my SIPP so I can use it and other DC pots to fund retirement ahead of drawing the LGPS.  My AVC is currently worth 37% of my LGPS+AVC value, so there is currently quite a large residual sum with which to buy additional LGPS pension, but that percentage will start to drop as the LGPS value continues to rise.  I could of course drawdown that excess instead.  I'll decide nearer the time.  

Thanks for this. I'm pretty sure it's the right option for my circumstances, too. Good luck with your investments!

ftbwannabe

daveyjp said:

You should also be pressing your employer to go salary sacrifice for AVCs. 

That would be nice, wouldn't it... (not going to happen, sadly)