AVC or Salary Sacrifice ?

Dick_here

Inspired by the debate in this thread:
http://forums.moneysavingexpert.com/showthread.html?t=815845

I've been giving my own situation more thought.

Now that Salary Sacrifice has come along, should I continue with my £30pm AVC, or stop that and put extra into the company scheme ? The company scheme has been downgraded so my current contributions (4.75% of salary) are now accruing at 1/65th per year of service. It used to be 1/60th. I have the option to switch back to 1/60th but it will cost me 6.75%.

Obviously the extra 2% will cost me more than £30pm, but assume I can afford the extra. Is there any reason not to pay 6.75% to get back to 1/60th instead of paying the £30 AVC or has the AVC any other benefits ?

Thanks guys !

Andy_L

Is your company scheme actually a salary sacrafice scheme? just because it's allowed schemes aren't obliged to do it.
The scheme rules may allow you to use the AVC to fund a lump sum without giving up any final salary pension - this is generally a "good thing".
Comparing 2% extra contributions with £30/pm is an apples & oranges comparison. You need to compare it with 2% of salary into the AVC (or indeed ISA rather than pension) & see which is better.

Dick_here

Andy_L wrote: »

Is your company scheme actually a salary sacrafice scheme? just because it's allowed schemes aren't obliged to do it.

Yes it is running one. My pension contribution is reduced from 5% to 4.75% because of it.

The scheme rules may allow you to use the AVC to fund a lump sum without giving up any final salary pension - this is generally a "good thing".

Yes, the AVC can be used to boost the lump sum.

Comparing 2% extra contributions with £30/pm is an apples & oranges comparison. You need to compare it with 2% of salary into the AVC (or indeed ISA rather than pension) & see which is better.

Fair point Andy. But assuming I was paying 2% into the AVC, how would I do the comparison ?

All I can see clearly as different is that I could accrue at 1/60th by paying extra 2% into the pension which would help me retire a bit earlier, whereas the AVC would only kick in when I retired 'normally'.

jonathon_hart

One point to bear in mind is that if you are sacrificing salary then you may be reducing the final salary that your main benefits get calculated on.

Which one AVC or increased Final salary benefit is better is a very difficult question to give a clear answer to as it will depend on the Investment performance of your AVCs and any salary increases you get.

You should be able to take your AVC benefits at the same time as you retire the Final salary benefits, even if this is early retirement. (Do remember though that your final salary benefits may be reduced if you retire early).