AVC WISE - any experience

[mumtimestwo]

My husband has come home from work to say he had been offered an opportunity to take out these additional pension contributions by his employer (local government). He wants to buy as much as possible as he says roughly every £65 he pays in will be worth over £100 to take out as a lump sum when he retires - or he can take at 55. It sounds too good to be true. He is 54 at the moment and it’s likely that his job will be restructured out In the next three years if that’s relevant

apparently there are going to be some webinars for him to attend - but at the moment he seems inclined to throw as much money as possible to it.

thanks

If he is a tax payer, he will pay this from gross income. If he's a higher rate tax payer then yes £65 net income equates to over £100 that could be paid into a pension.

He can only take 25% of the DC pension pot (which I assume this AVC is paid to) as a tax free lump sum at age 55 and later.

He can take his pension and tax free lump sum at age 55 but if he carries on working there are restrictions on future contributions. The pension is taxed as it would be for income.

Is this a DC or DB scheme? Are the employers offering any matched contribution?
If it's a DC scheme, what fees are applicable and what investment choices are on offer?
What are the advantages of this AVC scheme compared to opening a low cost SIPP?

Thanks. These are all good questions. I assume it’s DC. It’s some sort of shared thing so salary sacrifice and a £1 payment or something. He was trying to show me the calculator which said if he paid in £300 a month for 3 years he would actually only lose £200 out of salary but then when he was 55 his £200x12monthsx3 years would be worth about £11k but he would have only paid in £7200. (Very rough figures of top of my head)

he seems to think he could take it all at 55.

I work for Local Government have paid into AVCs. For me it has worked well. You can only take the AVC value at the same time as you take the main scheme pension. You can take the whole value of the AVC as a tax free lump sum as long as it is not more than 25% of the total value of your pension and AVC.

I'm in LG and pay into AVC
It's defined contribution so youre money is invested in a fund(either default fund or you can choose from a number of different funds.) So like any stock market investment, there is no guarantee as to how much the fund will grow and could potentially lose money. If your husband only has a few years till he might want to take it all, he might be better just saving as much as possible into a good interest rateaccount. Also as mentioned you can only take AVC s as same time as your pension. If he wants that early ie before the normal pension age of the scheme (prob. 65 or state pension age) then there is an reduction on the pension paid. There is at table about this in the pension state t.

Statement. I know this cos I was looking at mine earliee and its about a 25per cent reduction if you want to take your pension 10 years early!!!

Have a look on the Money Saving Expert website. There are a lot of posts about this very topic. They always reckon you should put as much in as you can afford.

Even if the AVC fund loses money, by the time you factor in the tax relief on the payments in (especially if he’s a 40% taxpayer) he’s still likely to be better off. And yes, as WhoInvitedHer said, he will be able to take the whole AVC fund as a tax free lump sum at the same time as taking his main LGPS pension as long as the total lump sum taken doesn’t exceed 25% of the total value of the LGPS + AVC benefits.

Also by doing it as salary sacrifice he will be saving some NI so will also be better off that way.

The current minimum age for drawing pension benefits is 55 but from 2028 this will rise to 57. There are some protections for people already in pension schemes when this change was announced, but it’s not yet clear whether these protections will be applied to LGPS. They probably will, but it can’t be guaranteed. Safest to plan for 57 being the minimum age he’ll be able to take anything, then if he can go earlier it’s a bonus.

However as cozycat said, the main LGPS benefits are reduced for early payment for taking them before normal retirement age, and that can be a hefty reduction. Normal retirement age is now linked to state pension age which could be anywhere up to 68, so going at 57 could be 11 years early which could be almost 40% reduction on at least part of his benefits ( see here https://www.lgpsmember.org/your-pension/planning/taking-your-pension/). The reductions don’t apply to the AVC fund but he can only take this at the same time as the main scheme benefits.

So if he wants to take his benefits at 57 (possibly 55) he will need to bear in mind the potentially large reductions for early payment and decide if that’s worth it.