How to convert an AVC fund to an annuity?

erb

This thread has been useful for me too. I have a deferred pension with a previous employer and also AVC with Equitable Life arranged through my previous employer's pension administrators.

Questions - I am thinking of transferring my deferred pension into my current employer's pension scheme. So what are my options for the AVC pension? Does this have to remain and are my previous employer's pension administrators still the legal controllers of this AVC?

Debt_Free_Chick

Erb

The AVC is part & parcel of the pension you get from your previous scheme. So if you want to transfer the deferred pension from that scheme, the AVC will be transferred too. You can't split them up.

Is your Equitable AVC in the with-profits fund? If so, then you'll unfortunately take the hit for cashing it in early.

Just out of interest ... why do you want to transfer your deferred pension? It's unlikely to provide a dramatically better pension in your new employer's scheme. Generally, the new scheme will simply provide a pension that's equivalent in value to the old pension.

HTH

dunstonh

Erb, is the AVC an in-house one or a Free standing AVC.

If FSAVC, once the employment link has been broken with the original scheme it was linked to, you are free to take the benefits whenever you like (within pension rules).

As it currently stands, you may be better waiting for April 2006 when AVCs get reclassified and have more options available to them. (like tax free lump sum). This should also increase your switching options.

If you old scheme is a full occupational scheme, more often than not, you are better off leaving it where it is because of retained benefits. It is not the sort of thing you should be looking at yourself. You should seek advice from an IFA. And not just any IFA. They should have G60 qualifications as occupational pension transfers are higher risk and require a higher level of knowledge.

MarkyMarkD

Just out of interest ... why do you want to transfer your deferred pension? It's unlikely to provide a dramatically better pension in your new employer's scheme. Generally, the new scheme will simply provide a pension that's equivalent in value to the old pension.

This is true for many people.

But if:

(1) you are transferring from a defined contribution scheme to a defined benefit scheme; or
(2) you are transferring from one defined benefit scheme to another; and
(3) you expect your salary to increase by more than inflation

then it's better to transfer the deferred pension as the benefits will increase in the new scheme by more than they would in the old scheme.

Debt_Free_Chick

This is true for many people.

But if:

(1) you are transferring from a defined contribution scheme to a defined benefit scheme; or
(2) you are transferring from one defined benefit scheme to another; and
(3) you expect your salary to increase by more than inflation

then it's better to transfer the deferred pension as the benefits will increase in the new scheme by more than they would in the old scheme.

It's not quite that simple.

If you transfer from DC to DB, then you would need to compare the effective future rate of return that the DB scheme is giving you with what you might get if you left the DC funds where they were. And then you need to compare the effective annuity rate that the DB scheme is giving you with whatever the annuity rate might be when you retire. So you are swapping uncertainty (in the DC scheme) with certainty (in the DB scheme), but there's no way of predicting whether this will produce the higher pension. As is normally the case, you usually only get to limit your downside if you're prepared to limit the upside, too

And if the transfer is DB to DB, then fewer schemes allow added years these days. They normally just promise an extra £x pension. This is effectively swapping one deferred pension for another.

Where a scheme does offer added years, then an assumed future rate of salary increases is built in automatically. You would need to be confident that your actual future increases would exceed the rate assumed. And if you leave well before NRA, you would lose the salary increases you would have received from date of leaving and NRA.

As I say ... not quite simple. At the end of the day, pension schemes are operated on a "not for profit" basis, so you would not find a huge financial benefit by transferring.

Regards

erb

Answers to the points raised.

Debt_Free_Chick
Yes the Equitable AVC is in the with profits fund but has a guaranteed interest rate of about 3%.
I am considering transfering as my current scheme is a final salary defined benefit scheme and I think future salary increases will be higher than inflation. I will buy additional years pension in my current scheme based on current earnings but my pension will be based on years service and final salary when I retire. My deferred pension was also a final salary scheme but is now only increasing with RPI inflation.

DD
The AVC scheme was an in house scheme not FSAVC.

I will consider in more detail when I get the transfer value and see how many years this will buy in my current scheme. However, if the Equitable Life AVC part is reduced for cashing in early this may outweigh the benefit from future salary increases being higher than RPI.

MarkyMarkD

Debt_free_chick

Most schemes that I've known of give an equivalent number of years based on the value transferred.

Anyone who doesn't think it's worth transforming DC benefits into DB ones is (IMHO) off their trolley. It transfers all of the investment risk to the company.

It is also rash to assume that DC will provide a return over and above salary growth.

If you are an employee worth having, it is worth negotiating with your future employer that you are guaranteed an equal number of years in the new scheme as you had in the old scheme. If they really want you they may play ball. I certainly knew of one company which ALWAYS matched the number of years - despite the fact that most employees moved to them for an increase in salary.

peterfleet

I have a hypothetical question that is prompted by Erb's thoughts of considering moving the former employer's AVC (with the associated occupational pension) to one with the current employer. The experts have pointed out that Equitable Life will reduce the AVC fund by what I understand is called a Market Value Ajustment (about 15% to 18% I believe) upon transfer.

Suppose Erb was advised, because say Erb was within 5 years of normal retirement age, to take early retirement pension from the former employer's scheme while also continuing in work and contributing to the current employer, would the Equitable Life AVC fund still be hit by the MVA deduction?

Debt_Free_Chick

Debt_free_chick

Most schemes that I've known of give an equivalent number of years based on the value transferred.

As I said, it's becoming less common. With added years, if you "do well" i.e. you get a better pension than that supported purely by the transfer value, then the employer is funding the increase. For this reason, fewer schemes are offering added years. Employers have cottoned on to the fact that if your salary increases by more than the rate built in to the added years, then they have to pay for it!

Anyone who doesn't think it's worth transforming DC benefits into DB ones is (IMHO) off their trolley.  It transfers all of the investment risk to the company.

That's just one of the features to consider. You also transfer all the upside of good investment return to the scheme. So if future investment performance is excellent, you don't get anything extra - it goes into the general funding of the scheme. You also lose the flexibility of "modelling" the annuity at retirement on your specific circumstances e.g. if you don't want a spouse's pension on death. With a DB scheme, you get a package of benefits and no flexibility.

It is also rash to assume that DC will provide a return over and above salary growth.

Indeed. It may also be rash to assume that you get future salary increases in excess of inflation. It depends on who you are, where you work and what type of work you do. Many investment banks (traditionally, high payers) have had a pay freeze for the past 3 years - that's no increase in pay, at all!

But it's not as simple as comparing investment growth with just salary increases.

If you are an employee worth having, it is worth negotiating with your future employer that you are guaranteed an equal number of years in the new scheme as you had in the old scheme.  If they really want you they may play ball.  I certainly knew of one company which ALWAYS matched the number of years - despite the fact that most employees moved to them for an increase in salary.

You can't just compare the number of years. 1 year at 60ths payable at age 60 is worth more than 1 year at 80ths payable at age 65. You have to look at the benefits provided by each scheme.

If you had 5 years in a scheme providing 60ths at age 60 and wanted 5 years in a different scheme providing 80ths at age 65, then I'm sure the employer would accept your offer  ;)

Having been a pensions manager for more than 25 years, I've never worked for an employer who agreed to this.

I'm not advocating that one way is necessarily better than another. But I stick to my original comment

You do not benefit financially from a transfer. What you get in the new scheme is financially equal in value to what you had in the old scheme.

It's no different to buying £5 worth of apples & £5 worth of grapes. You get more grapes .. but you still only get £5's worth  ;)

Regards

Debt_Free_Chick

Suppose Erb was advised, because say Erb was within 5 years of normal retirement age, to take early retirement pension from the former employer's scheme while also continuing in work and contributing to the current employer, would the Equitable Life  AVC fund still be hit by the MVA deduction?

In all probability, yes

He would need to look at the terms of the AVC contract, or at least ask the administrators to confirm the position.