AVCs

[237SJ]

If someone with an existing AVC has 12 years until retirement, would it be worth increasing contributions or would it be a bit too late for the money to realise a profit?

[factor-fiction]

It's not easy to answer - you really need impartial financial advice. It depends on what other retirement provision you have. If you are a higher rate taxpayer AVCs are more likely to be worthwhile. If you felt AVCs were worthwhile when you joined then it's probably worth topping up now and you should step up contributions regularly. 12 years is a long time for contributions to grow.

[237SJ]

Thanks factor. I don`t really want financial advice exactly, I was just wondering if 12 years is long enough to bother or if it`s too late. I probably will increase. I always think financial advisors are going to sell me something and I`m quite happy with my company`s pension (as much as anyone can be)

[Hymie]

Personally I would advise against paying AVCs under any circumstances for the following rationale.

The only plus side to investing in AVCs is the tax fee element – if you are a basic rate tax payer, for every £100 of your money (that you would otherwise have paid tax on) paid in – the actual amount paid to the scheme would be £125.

So lets assume that over a 12 year period you pay a total £10k into AVCs, which would actually be £12.5k, with the tax break element.

For simplicity, lets assume your investment did not do well, and did not appreciate over the 12 years.
So at the end of 12 years, you now have an AVC pension pot of £12.5k rather that a non-pension invested pot of £10k.

To the uninitiated, having a pension fund 25% greater that a non-pension savings fund might seem the better deal. But when you consider that you must buy an annuity with your AVC’s – which is rather like a savings account, paying you interest only – the capital sum which the bank get to keep when you die; you might then come around to my way of thinking.

The position might be more favourable for a higher rate tax payer, in that for every £100 paid in would equate to £167 due to the tax break.

[factorfiction]

So are you saying hymie that no pension is worthwhile (since the same argument applies) unless it's subsidised by employer contributions.
The returns on AVCs may or may not outperform the rate you get if you leave your cash in the bank. If ithe AVCs are invested in the stock market it's likely I think that over 12 years they will outperform a bank account, although charges may reduce the gain.
As you say, hymie, annuity rates are not great at present and you never get hold of the capital (apart from the 25% you can take tax free) but the annuity rate will be better than the interest rate paid by a bank account.
One advantage of an AVC over saving in the bank is it's too easy to dip into savings or to stop making the payments .
Anyway, it's not a straightforward choice. Good luck 237SJ

[Hymie]

I certainly would not invest any money in a scheme under which money paid in was tax free – but money paid out could only be realised through an annuity – which is what a UK money purchase pension scheme is.

However, I am in my company money purchase pension scheme – so why, I hear you ask?

Well, for every £5 I pay in, my employer pays in £8. So for every £50k I pay in, my total pension pot payments will be £130k (not counting the tax efficient element).

But without such a contribution from my employer, there is no way I would be giving my money to the pension companies – and neither should anyone else.

[237SJ]

Thanks for your answers everyone. I`m a little but more informed but still not completely sure. I think I will increase. My AVC is run by my emplyoyer and I`ve heard from collegues that it`s not bad but of course I can`t ask our work pension service about it because they`re not allowed to give financial advice. We have 3 different funds we can invest in and it`s up to the employee to decide which one as their performance can change. I`ll have to sit down and look at how they`re performing sometime. My retirement age is less than the state retirement age so I`ll have to get my act together. Thanks again

[Hymie]

Should you seek advice as to whether you should pay into tax efficient AVC’s or some other form of investment – ask the advisor this question:-

At age 65, would I be better off having £125,000 which must be ‘invested’ in an annuity – or to have £100,000 with which I am free to spend/invest as I please.

The answer to the above question is a no brainer – unless you are an insurance company selling AVCs.

[mokane002]

You should ask your administrator if the Scheme has a post A Day which allows you to (1) use the AVC in calcualting your maximum tax free lump sum, and if you can take the AVC as the first tranche of the lump sum - if so you are getting tax refief on the conts going in and are able to take the whole lot out tax free as well

[Whoever]

I think another issue is how much other money you have put aside in alternative savings for your retirement, as having all your retirement savings in one basket, i.e. your pension pot, could make for inflexibility if your personal circumstances change. You may have to retire early or be made redundant and need the flexibility of having access to other money before the age at which you can have access to your pension fund. Putting some of the money you have for additional AVC contributions into equity ISAs may give you that flexibility, as 12 years is long enough for the money to grow in the same way that it would if you had chosen an equity option for your AVC contributions. You have to balance off the tax benefits of AVC contributions against the flexibility of having access to an ISA which is totally under your own control.