AVCs, what do we know?

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  • AVCs, what do we know?
  • Premier Icon Onzadog
    Subscriber

    I wish I was in one of those gold plated pensions, but I’m not, just the defined contributions scheme for me. At the moment, it looks like I’ll get £4k a year from it.

    I have the option of making some additional voluntary contributions with the obvious tax benefit of come directly out of my salary.

    However, is this really the best use of the money? Would I be better off just sticking it under the mattress?

    I’m rather risk averse so not inclined to put it all on black.

    Anyone know their way around pensions, or should I spend it all now and expect to work until I die?

    oldnpastit
    Member

    There’s a £40k annual limit and a lifetime contribution limit. Once you blow through those, it stops being worth doing (bigtime).

    But if you haven’t reached the limit, then I would say stick it in, especially if you are a higher-rate tax payer (which increasingly applies to everyone thanks to the joy of fiscal drag).

    footflaps
    Member

    A £4k pa annum pension is approx  £200k fund, so no where near £1.03 lifetime allowance.

    I’d say stick as much as you can in, no one* ever complains of having too high a pension…

    * ok not many…

    oldnpastit
    Member

    Annuity rates these days 😯

    How old are you? How long till retirement? And what’s your marginal tax rate?

    If you’re higher rate tax payer it’s a no brainier, IMO.

    Normal rate, you may want to consider an ISA instead, in theory there is no difference on your tax position (either pay on way in or way out)

    Think of a pension as a wrapper, not the investment. What you buy inside your pension wrapper is the key bit.

    If youre 20+ years from retirement you probably want a high percentage of equities.

    The closer you are to retirement you’d want to increase fixed income / bonds allocation.

    Although if these are AVC’s you may want higher risk and stay invested during retirement. YMMV

    Premier Icon Greybeard
    Subscriber

    The scheme I was in allowed you to take 15% of your pension pot as a tax fee lump sum. But the taxman allows you to take 25% as a tax free lump sum. The advantage of an AVC in that situation is that it counts as part of the scheme, and I was able to put the extra 10% into AVCs then take it tax free. If I’d put it in a SIPP or any other freestanding pension I wouldn’t have been able to do that, as the 25% is per scheme. But the rules of each scheme are different and you may not be able to do the same.

    “The scheme I was in allowed you to take 15% of your pension pot as a tax fee lump sum. But the taxman allows you to take 25% as a tax free lump sum. The advantage of an AVC in that situation is that it counts as part of the scheme, and I was able to put the extra 10% into AVCs then take it tax free. If I’d put it in a SIPP or any other freestanding pension I wouldn’t have been able to do that, as the 25% is per scheme. But the rules of each scheme are different and you may not be able to do the same.”

    Que?

    Premier Icon edhornby
    Subscriber

    find out whether you are topping up the pot itself or a separate investment – if it’s the latter, I’d be wary because if / when you move employer you end up either with a small investment that isn’t worth much or you get stuffed for transfer fees

    Premier Icon grumpysculler
    Subscriber

    Look at readily accessible savings, make sure you have good sized pot there (you’ll find guidelines of anything from 3 months to 1 year salary). That’s your “oh shit” fund.

    Then the rest depends a lot on what you want to do and when. Bear in mind you will get state pension at some point, but you haven’t told us how much you would like to have when you retire. If £4k plus state pension does it for you, you’ll get a different answer to if you really think you need £20k pa income.

    Que?

    Some DB schemes have historical, and odd, rules about things.

    Premier Icon Onzadog
    Subscriber

    I’m in my early 40s and while I’m in a good job now, I haven’t been for a long time so thinking about the pension is new to me. In 25 years time, when I can get a state pension, I doubt such a thing will even exist in any real terms so, yes, if I could generate £20k a year from a private pension that would be great, but to do that, I think it would mean living like a pauper between now and retirement which does seem to rather miss the point.

    Premier Icon the-muffin-man
    Subscriber

    A good friend of mine (who’s high up in social services) said that the problem with drawing a modest pension is that when you get to retirement age you’d be unlucky enough to end up with just enough income to stop you claiming any benefits, home care, care home fees etc.

    Better to spend it on coke and hookers now or stick in under the mattress and let the state provide. 🙂

    footflaps
    Member

    >Better to spend it on coke and hookers now or stick in under the mattress and let the state provide.

    You reckon you can live on £8k a year?

    I’m sure you can survive….

    Premier Icon the-muffin-man
    Subscriber

    You reckon you can live on £8k a year?

    Nope – It was rather tongue in cheek. But I know from my parents experience you can get a lot lot more than that. And playing the system fairly too – no underhand shenanigans.

    What I am saying though is don’t have all your assets visible. Buy some gold/jewellery etc and stick it in a safe deposit box. Something you can cash in if needed.

    Premier Icon Onzadog
    Subscriber

    I’m not sure I need to hide any assets at this rate, I’ll be well below any threshold.

    Premier Icon Greybeard
    Subscriber

    Que?

    OK, I’ll step back a bit. Since the question was about AVCs specifically, not just putting more in a pension, I was assuming (possibly incorrectly) some existing knowledge. AVCs are additional contributions into your <span style=”text-decoration: underline;”>employer’s</span> pensions scheme. Unless you have a particular reason to put your extra pension money there, you’re better with a separate private pension, then there are no complications if you change job. For normal pension contributions, the company usually add something to what you put in; I’m not aware that any do this with AVCs, but there might be some, which would be a reason to do AVCs. Otherwise, it’s only worth it if the pension scheme has some odd rules, like mine did, where I could use AVCs to get the full legal tax free amount.

    Premier Icon Onzadog
    Subscriber

    It looks like the only benefit to avcs is that they are deducted at source so you get tax relief on them.

    Surely if you take your pay and put some if it in a private scheme, don’t you lose that tax advantage?

    But then, I’ll happily admit, I know nothing about pensions other than I doubt I’ll ever be able to afford to retire?

    Premier Icon Greybeard
    Subscriber

    Surely if you take your pay and put some if it in a private scheme, don’t you lose that tax advantage?

    You don’t lose the tax advantage, but it’s not done at source as your employer isn’t involved. For SIPP (Self Invested Personal Pension), which is a bit like an ISA but for pension not savings, you take your taxed money, pay it in to the SIPP and a couple of months later the HMRC pay the tax in. So if you earned 1000 gross, that’s 800 taxed, pay that into the SIPP, taxman adds the 200. If you paid more than 20% tax, or less, you’d need to sort it out with HMRC, possibly by doing a tax return.

    I assume other personal pensions work the same way but I only have experience of a SIPP. The difference being that in a SIPP, you decide how the money in the pot is invested, rather than the pension provider doing it.

    Premier Icon Onzadog
    Subscriber

    So, as a higher rate tax payer, I’d be better off with a private pension? Pay in net earning, let the tax man put some more in, then Chase the extra tax via a tax return?

    But I could expect that to out perform the company scheme?

    Sorry, I really do know nothing about pensions.

    poolman
    Member

    V interesting points above thanks, my avc pot does not really do anything.  I did tick the low risk option so it plods along, sadly its buying power is terrible.

    Assuming you are a home owner theres the capital of your house and the option of downsizing on retirement.  Thats a tax free capital sum.

    Although current interest rates are low at c 1% they will not be forever.  The ftse yields c 4% so i would base my income on that.

    Longevity – if your parents lived to say mid 80s and you have a good medical history, chances are you will live longer.  A mate of mine has not been well so is spending all his money, he does have rather a lot of it to get through.

    I too think the state pension will be long gone by the time i get to claim it, i am maxxed out on voluntry contributions to it too.

    DT78
    Member

    don’ forget about child benefit claw back (if it applied to you)

    Premier Icon pyranha
    Subscriber

    onzadog  no, you get exactly the same tax relief, but there are different ways of getting it, according to the mechanism by which your contributions g into the scheme.  I suggest you should speak to an adviser before doing anything as much of what you have written makes it clear you know little about pensions and savings.

    If your company scheme is defined contribution, you need to know how it is invested and if you have investment choices (most will), in which case putting money into a different scheme might not be any advantage, but will expose you to another set of charges (which may not be significant, but who knows until you check?).

    As usual on threads about pensions, there’s a lot of partial knowledge, and some misinformation above, so be careful which advice you take (applies to what I write too).

    footflaps
    Member

    The difference being that in a SIPP, you decide how the money in the pot is invested, rather than the pension provider doing it.

    With DB pension you don’t get a choice. With any other Personal Pension (SIPP, Stake Holder etc) you can decide what to do with the pot at any time. You can choose draw down or buy an annuity.

    Premier Icon Onzadog
    Subscriber

    pyranha I’ll be the first to admit I know nothing about pensions. Getting advice makes a lot of sense, but opens up the can of worms which is, where do I go for trustworthy advice?

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