LGPS Shared Cost AVC vs Stocks & Shares ISA – what would you do?

chicken444

I am in my 20s and have recently started working for a local authority. I’m a member of the Local Government Pension Scheme (LGPS) and contribute a percentage of my salary into the scheme.

I’ve been offered the opportunity to join a Shared Cost AVC (salary sacrifice AVC). From my understanding, contributions can benefit from both income tax and National Insurance savings because they are made through salary sacrifice.

My situation is:

Age: 20s

Salary: Mid-30k range

LGPS member

Already have a Cash ISA and emergency savings

Looking to invest/save for the very long term

Considering starting with around £50 per month into the AVC

I’m relatively risk-averse and don’t like the idea of losing money

The AVC provider has given me two lifestyle fund options, broadly targeting either:

100% cash towards retirement, or

Annuity purchase towards retirement

The scheme’s default option appears to be the cash-targeting lifestyle fund.

I’d be grateful for thoughts on the following:

1. Given my age and circumstances, would you generally favour a Shared Cost AVC over investing the same amount into a Stocks & Shares ISA?

2. Does the combination of income tax relief and National Insurance savings make the AVC particularly attractive compared with an ISA?

3. Which type of lifestyle investment option would you be inclined towards, and what are the main considerations?

4. As someone who is relatively cautious about investment risk, would an AVC still be appropriate, particularly given the long investment timeframe?

5. If I eventually leave local government employment, what would generally be the options for dealing with the AVC and pension savings?

6. My understanding is that pension/AVC funds can generally be accessed from minimum pension age, subject to the rules applying at the time. Would I potentially be able to take some or all of the AVC as a lump sum, and what tax charges, restrictions or other considerations might apply?

7. More broadly, if you were in your 20s with an LGPS pension already in place, how would you think about dividing additional savings between an AVC, Stocks & Shares ISA, and ordinary cash savings?

I appreciate that nobody on here can provide regulated financial advice, but I’d be interested in people’s experiences and general thoughts on the advantages/disadvantages of AVCs versus ISAs in this situation.

dunstonh

LGPS Shared Cost AVC vs Stocks & Shares ISA – what would you do?

You shouldn't be asking what others would do as their circumstances and objectives will be different to yours.

You should be looking at what is right for you.

I’m relatively risk-averse and don’t like the idea of losing money

That is most likely due to a lack of understanding. For example, which risks are you referring to?

Are you aware that cash can carry higher risks than equities for retirement planning?

1. Given my age and circumstances, would you generally favour a Shared Cost AVC over investing the same amount into a Stocks & Shares ISA?

Why S&S ISA and not LISA?

Why AVC and not additional pension or an individual pension?

2. Does the combination of income tax relief and National Insurance savings make the AVC particularly attractive compared with an ISA?

In most scenarios, pension beats ISA in outcome but there are some exceptions that.

3. Which type of lifestyle investment option would you be inclined towards, and what are the main considerations?

Neither. However, this is where your question "what would you do?" leads you down the wrong path. I wouldn't use. lifestyling fund. And despite the NI advantages of an AVC, I would be looking at the investment style I would use to see if I could replicate it in the AVC and would the returns be similar enough to justify the AVC. i.e. if an individual plan was lower cost and the funds I would use in that give a better outcome than the. AVC, then the NI advantage of the AVC would not be enough.

4. As someone who is relatively cautious about investment risk, would an AVC still be appropriate, particularly given the long investment timeframe?

You need to improve your understanding here. A tax wrapper does not influence the investment risk decision. A tax wrapper is just a container for your investments. An ISA, LISA, PPP, SIPP, SHP, AVC etc etc are all tax wrappers and can have identical risk. Its what you hold in the wrapper (container) that matters.

And you need to understand that investment risk is not the only risk. You have shortfall risk and inflation risk. Going too low on investment risk can actually increase your overall risks. You also have behavioural risk. You can be the biggest risk to any investment planning.

5. If I eventually leave local government employment, what would generally be the options for dealing with the AVC and pension savings?

Don't worry about that now. It won't affect any decision you need to make now.

6. My understanding is that pension/AVC funds can generally be accessed from minimum pension age, subject to the rules applying at the time. Would I potentially be able to take some or all of the AVC as a lump sum, and what tax charges, restrictions or other considerations might apply?

Again, don't worry about that for now. Pension rules typically change every 7–8 years. The options and terms available now will differ greatly from those you’ll have when you get there. Your main scheme will remain largely unaffected by many changes, while the FCA is more likely to be affected. AVCs lack the full functionality available elsewhere, but you can always transfer it later, making it a non‑issue.

7. More broadly, if you were in your 20s with an LGPS pension already in place, how would you think about dividing additional savings between an AVC, Stocks & Shares ISA, and ordinary cash savings?

Again, it's a very personalised question. I would have very little cash savings, so I wouldn't focus heavily on a Stocks and Shares ISA, nor would I use an AVC. The LISA is an attractive option for you. What are your future plans regarding property? I would likely be 100% equities because I consider cash far too risky for someone in their 20s looking at retirement planning.

QrizB

Welcome to the forum! There are some LGPS experts who will be along in a minute or three.

As I understand it the LGPS AVC has the unusual advantage that you can get tax relief when contributing then (with limits) take most or all of it as tax-free cash when you retire. This is potentially a 25% gain over an ISA where you'd have paid income tax and NI on your earnings before investing.

The drawback is that you can't get at the AVCs until you retire, whereas an ISA is accessible at any time.

chicken444

https://forums.moneysavingexpert.com/discussion/comment/82140757#Comment_82140757

Thanks for the detailed reply and I probably should have made a few things clearer in my original post.

I already have a LISA as well, and I intend to continue contributing to that. I’m currently hoping to buy a property in around 2 years, so the LISA is primarily part of my house-deposit planning rather than my retirement/investment planning.

I also think you’re right that my risk-averse attitude probably comes partly from a lack of understanding of investing. What I’m essentially scared of is seeing the value of my investments fall and not knowing whether/when they’ll recover to at least the amount I originally put in. I appreciate thats probably something I need to understand better rather than simply avoiding investment risk altogether.

I think my question is therefore perhaps slightly different from how I originally worded it. I’m not really looking for someone to tell me “I would choose X” because I appreciate everyones circumstances are different.

What I’m actually trying to work out is how to approach long-term investing appropriately when I have relatively little knowledge and want to take a hands-off approach.

For example, I’d like to understand:

What sort of investment approach would be sensible for someone in their 20s investing for retirement?

What should I actually be investing in, rather than just choosing a tax wrapper?

How much investment risk is reasonable given such a long timeframe?

How should I think about equities, bonds and cash?

Whether an AVC is actually a sensible way of implementing that approach, or whether I’d be better using another pension/investment option.

And whether the NI saving from the Shared Cost AVC is enough to make it worthwhile if the investment choices/costs aren’t as good as alternatives.

The reason I’m particularly considering the AVC is that it seems like a relatively hands-off way of making additional long-term pension contributions, and the salary-sacrifice/NI saving makes it sound attractive. But I’m conscious that I may be focusing too much on the tax wrapper without properly understanding what is actually inside it.

So I think what I really need to do is improve my understanding of the underlying investments and risk, rather than simply deciding AVC vs ISA

Silvertabby

Most LGPS members pay into an AVC account with with a view to taking all or most of their savings as tax free cash on retirement. As you are so young, if you continue in Local Government for most/all of your career, and if you pay into AVCs all that time, then your AVCs will almost certainly exceed the amount of tax free cash you will be allowed to take (HMRC rules, not LGPS). However, you would be able to use your surplus AVCs to buy additional fully index linked LGPS benefits, with or without spousal benefits (your choice - if the former, then the the annual pension bought would be slightly lower than if you had opted for no spousal benefits).

BUT. And this is a big BUT - you are 40 years away from the scheme NRA (normal retirement age). A lot can happen in that time, and no-one on these boards will be able to even guess at what rules will be in force then. All I can suggest is that you do what is best for you now (not allowed to give actual advice - but I'm a big fan of LGPS AVCs…) but keep a very close track of any future rule changes that may affect you.

FatherAbraham

I’m relatively risk-averse and don’t like the idea of losing money

That's the bit which may do you most harm.

A person in his or her twenties has a huge earning potential ahead, and can probably make the most of appropriate higher-risk opportunities. Paid employment is like owning a security which pays income (but probably no capital return at the end of its life). One must focus upon one's entire portfolio of assets, including probable future income.

Fear of losing money is debilitating, and counterproductive.. You could probably afford to lose everything, and still have decades ahead of you to recover. That puts you into an immensely strong position to gain wealth.

Some might even say that working for a local authority is not a sensible move for a young person, since this kind of benign employer generally pays badly. Youth is the time to try working in sales, with the potential for enormous commissions, or start-ups with their small potential for windfalls.

Albermarle

How much investment risk is reasonable given such a long timeframe?

How should I think about equities, bonds and cash?

Based on a long history, being 100% invested in equities ( via a simple global tracker fund) you should see an average annual return of around 7%. taking average inflation into account you should see a real return of 3 or 4 %. However along the way you will see years of much bigger increases and years when it drops. However the long term trend has always been positive. With bonds and cash savings you might see more like 1% pa real return.

Have a look at the graph in this article.

Martin Lewis: A beginner's guide to investing

LHW99

What I’m essentially scared of is seeing the value of my investments
fall and not knowing whether/when they’ll recover to at least the amount
I originally put in.

You could look at it in this way:

If my investments fall in value, they become cheaper to buy, so the same amount of my money will buy more of them. Then when they go back up again (which they almost certainly will, although the timescale is unknown) the cheap purchases will go up more in value than the ones that were a bit more costly when originally bought.

DRS1

As I understand it the LGPS AVC has the unusual advantage that you can get tax relief when contributing then (with limits) take most or all of it as tax-free cash when you retire.

This aspect of the LGPS AVCs makes them a very obvious thing to do with your money. Very obvious.

Better than putting it in a standalone pension where only 25% of the pension pot could be taken as tax free cash.

The reason the default lifestyle option is aimed at cash at retirement is because most people will be taking the AVC pot as tax free cash. Why wouldn't they? I have no idea what that lifestyle thing invests in and maybe you want to check that but frankly with your current level of knowledge you should probably just go for that and forget about it for the next 40 years.

If you want to learn about investing open an S&S ISA fund it with a small amount that you would be prepared to lose completely and then play with it. Read up on things before you buy them. Read investment related forums (lemonfool is one but there are others). Read threads on here and the Savings and Investment board about investment dilemmas such as how to invest £X00k or whether Tech/the USA is about to take a nosedive and how to reduce exposure to that. As you get used to it you may then be able to look at how the AVC pot is invested with a greater understanding.

Or watch some youtube videos (Pensioncraft is good; other posters may have other suggestions).

Triumph13

Any money you put into the pension will be locked away for more than three decades. 100% equities via a cheap tracker is the generally recommended investment for that timescale. The trick is not to keep looking at it - a famous study supposedly found that the most successful investors were the ones who had either died, or forgotten their passwords, and therefore left the investments alone to grow. You can start thinking about any de-risking in the last five or ten years before pension access age - giving you plenty of time to read up on the subject :)

The key question for you at the moment is whether or not now is the right time for you to be locking money away for decades? You want to be sure that a) you won't need it before then, and b) you won't have the opportunity to contribute with a higher rate of tax relief in the future.

SarahB16

Welcome to the forum and hello from a fellow LGPS member (who also makes LGPS AVC contributions).

1. Given my age and circumstances, would you generally favour a Shared Cost AVC over investing the same amount into a Stocks & Shares ISA?

A shared cost AVC is better than a S&S ISA but your money is locked away. Would it be better to buy your new home first so you still have access to the funds and then look to open the LGPS AVC after you have bought your property?

2. Does the combination of income tax relief and National Insurance savings make the AVC particularly attractive compared with an ISA?

Yes, extremely attractive, but even more so when you are a 40% tax payer but that money is locked away for a very long time. I think your number one priority at the moment needs to be buying your new home.

3. Which type of lifestyle investment option would you be inclined towards, and what are the main considerations?

Perhaps share the full list of funds with us and not just the ‘lifestyle’ options and without giving you any advice we can just give you our opinions. I think there are Prudential and Aegon who manage LGPS AVC funds but there may be others.

4. As someone who is relatively cautious about investment risk, would an AVC still be appropriate, particularly given the long investment timeframe?

Yes, LGPS AVC investments are probably the best investments you can make but moderation re contributions is key especially if you think you would likely be a 40% tax payer and still working in Local Government as you may wish to contribute a larger amount later on. But check on what those underlying fund options are. Whether it is appropriate for you at this stage in your life I'm not so sure as you are not yet on the housing ladder.

5. If I eventually leave local government employment, what would generally be the options for dealing with the AVC and pension savings?

If you leave local government then it will just be deferred (unless there was an arrangement that it could be transferred over). Work on the assumption that it will remain deferred until you decide to draw it down when you take your LGPS pension.

6. My understanding is that pension/AVC funds can generally be accessed from minimum pension age, subject to the rules applying at the time. Would I potentially be able to take some or all of the AVC as a lump sum, and what tax charges, restrictions or other considerations might apply?

Yes, you could take all (taking some of it is not an option) the LGPS AVC at minimum pension age but that is definitely not something I would wish to do due to the heavy actuarial reduction that would be applied to your LGPS pension.

7. More broadly, if you were in your 20s with an LGPS pension already in place, how would you think about dividing additional savings between an AVC, Stocks & Shares ISA, and ordinary cash savings?

We are all so different but if I were in your shoes my priority would be getting on the property ladder first and not putting money away that I could not access. So for now perhaps an LGPS AVC is not the right time. Focusing on S&S ISA and ordinary cash savings may be better as you may need those to help you buy your new home but only you can decide. Then perhaps when you have bought your property you could then contribute to a LGPS AVC.

Do come back with any further questions you may have.