Is my added years AVC good value?

bitsandpieces · 19 October 2018 at 2:17PM

I'm in the USS pension scheme. I have an added years AVC - have about £540/month taken off my pay slip for this (on top of my normal pension contribution). I'm trying to work out if this is still good value (because of changes in the scheme a couple of years ago, it becomes worse value for me as I rise up the pay scale).

I've worked out that this AVC buys me 0.39 added years each year. A year of pension contributions is worth 1/80 of my Mar 2016 salary (increased with RPI) in pension, and a 3/80 lump sum on retirement. The annual pension has some inflation protection (as described here).

I make it that I'm paying about £6480/year for an extra annual pension of around £190/yr... (and 3* lump sum on retirement). That £190 will increase with RPI up till my retirement. How does this compare to what I'd get if I invested in a defined contribution AVC instead?

Hope the above makes sense - I can include more detail and numbers if useful, but this is already a long post! The changes since they closed the USS final salary scheme do make it complicated...

kidmugsy · 19 October 2018 at 3:20PM

bitsandpieces wrote: »

I'm paying about £6480/year for an extra annual pension of around £190/yr... (and 3* lump sum on retirement).

That's an unilluminating way to phrase it.

To first order it doesn't matter whether your £6,480 goes in over a year, six months, or a decade. The point is that £6,480 of capital buys you an index-linked income of £190 p.a. (plus widow's pension?) for the rest of your natural after scheme retirement age.

Both those figures ignore tax, I imagine?

Anyway, if your arithmetic is right I don't think I'd find it a compelling proposition - though it would be better if I could pay it by salary sacrifice, or use it to avoid income tax at the higher rate. On the other hand where else can you buy an income with inflation-protection that's better value?

Anyway, I guess that it would have a rather inflexible outcome - you either draw the extra DB pension at scheme retirement age or pay an Actuarial Reduction for taking it earlier. Is that right?

bitsandpieces wrote: »

How does this compare to what I'd get if I invested in a defined contribution AVC instead?

Nobody knows; nobody can know - that's the essential difference between DB and DC.

Would you be allowed instead to pay the same amount into the USS DC section? What's the deal on getting that money out? What are the costs there? What's the choice of investments?

bitsandpieces · 19 October 2018 at 3:54PM

kidmugsy wrote: »

The point is that £6,480 of capital buys you an index-linked income of £190 p.a. (plus widow's pension?) for the rest of your natural after scheme retirement age.

Both those figures ignore tax, I imagine?

Thanks. Both figures ignore tax - the £6480 is taken off of my pay before tax, though I'm not in a higher rate tax band.

You're right that partner's benefits are an additional factor: I think they would get about 50% of the pension if I died before them, though the changes to the scheme complicate things so I'd need to check that.

I could pay the money into USS's DC scheme - which does seem more flexible https://www.uss.co.uk/members/members-home/the-uss-scheme/uss-investment-builder That is a good point about the buying of inflation-protected income, though...

It does sound like it's worth speaking to an IFA soon to discuss options in more detail (I get a free pensions advice appointment through my union, so will take advantage of this). It sounds like it's already at the point where the added years AVC may not be particularly good value, and assuming I continue receiving annual pay increments it will become worse value over time.

kidmugsy · 19 October 2018 at 4:38PM

The other thing to say is that if your career-averaged income is much higher than your current income then you'll get much more than £190 p.a. Is that an attractive gamble?

bitsandpieces · 21 October 2018 at 5:44PM

kidmugsy wrote: »

The other thing to say is that if your career-averaged income is much higher than your current income then you'll get much more than £190 p.a. Is that an attractive gamble?

Sadly, because of reforms to the scheme, the £190p.a. is based on my 2016 salary (with additional increases to keep up with RPI). If my salary does rise above RPI in coming years, the added years bought through the AVC won't be worth any more, although another part of my pension will be.

kidmugsy · 22 October 2018 at 1:55AM

bitsandpieces wrote: »

Sadly, because of reforms to the scheme, the £190p.a. is based on my 2016 salary (with additional increases to keep up with RPI). If my salary does rise above RPI in coming years, the added years bought through the AVC won't be worth any more, although another part of my pension will be.

Hmph! At least USS seems to have given up some of their bonkers extravagant habits: for you, long term, that's probably a good thing.

Are you sure it's RPI? One of my DB pensions is from USS and I get a CPI increase. Well, strictly I get a less-than-CPI increase for arcane reasons that I occasionally understand until I forget the explanation again.

bitsandpieces · 22 October 2018 at 3:17PM

kidmugsy wrote: »

Are you sure it's RPI? One of my DB pensions is from USS and I get a CPI increase. Well, strictly I get a less-than-CPI increase for arcane reasons that I occasionally understand until I forget the explanation again.

Sorry, you're right - it is CPI, and capped.

bitsandpieces · 11 January 2019 at 7:55PM

I've decided I'll be cancelling at least some of my AVC (using the money for mortgage overpayments initially, and subsequently for a DC AVC). I'm trying to decide how much to cancel. Does the added years AVC seem any better value after recent market turbulence, or is this kind of disruption just something not to pay too much attention to in terms of long term planning?

Dazed_and_confused · 11 January 2019 at 8:34PM

Thanks. Both figures ignore tax - the £6480 is taken off of my pay before tax, though I'm not in a higher rate tax band.

By cancelling it (or reducing it) you will start paying more tax. That may move you into a higher rate band.

kidmugsy · 11 January 2019 at 11:52PM

bitsandpieces wrote: »

Does the added years AVC seem any better value after recent market turbulence, or is this kind of disruption just something not to pay too much attention to in terms of long term planning?

The future is so opaque that it's probably impossible to say. If overpaying the mortgage adds to your feeling of security, it may be a good choice for the moment. If the market crashes you might then like to divert money into the DC section instead.

Overpaying can be an especially good idea if (i) it reduces your LTV far enough to qualify you for a lower interest rate, or (ii) if it's an expensive interest rate you're paying at the moment.

But, but; you may be able to do better by banging money into a monthly saver account paying 5% AER (e.g. at Nationwide). I assume your mortgage rate is substantially lower than 5%? Then when the account matures consider what to do with the accumulated capital.

bitsandpieces · 13 January 2019 at 10:58PM

Thanks - good point about tax! I wouldn't be into the higher tax band yet, but that will make upping contributions more attractive if my pay does rise (which would be a nice problem to have!)

I'm maxing out 1st direct and Nationwide's regular savers at the moment, with the plan being to put the proceeds into the mortgage when they mature (if that's the right word). This will just let me clear the mortgage a bit quicker still...though it sounds like it might be worth looking if there's a 3rd regular saver I should open.

Is my added years AVC good value?

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