LGPS - APC or AVC ?

[penpension]

I’m in a Local Government Pension Scheme and thinking about playing additional money into it. Looking on the website you can either pay additional pension contributions or additional voluntary contributions.

From what I understand the key points to each are-

APC
This pays into the defined benefit part of the scheme and tops up the current pension.

You know what you have to put in and you know with certainty what you will get out.
if you die then none of this money goes to anyone else.
I based the calculation on £100 per month for one year into this scheme and it worked out at £98 per year. Therefore if I understand that bit correctly, you’d need to claim the pension for 12 years to break even on the investment and any subsequent years is a bonus. (These figures I am not sure about.)

AVC
This pays into a separate pot which is defined contribution.
You can be fliexible with how much you put in but there is no guarantee on what you get back and this could go up or down.
Therefore, there is no calculation to get an idea of your return if you were to input, say, £100 per month.
There are a few things you can do when you reach retirement age with the pot from this AVC.
If you die, some of the money will go to someone else.

My main reason for wanting to choose APC is that it is defined benefit so if I live longer than 12 years, I am getting free money. I also like the certainty of knowing how much I will receive.

My main reason for choosing AVC is that if I die then some of the money will go to someone else.

I can only afford a small amount extra to go in the pot, but was just thinking that a small amount over say 20 years could turn into something reasonable at retirement.

Has anyone got any insight into what they did and their reasons for it or can anyone confirm that my thoughts above are correct or mistaken?

Thank you

You're broadly right.

On the extra DB payments, how much extra you get for what you put in will depend on your age. If you're interested in this, you need a proper calculation- the website might be able to do this for you (I know the civil service one does).

On the AVCs, you can get a very rough idea of returns as follows-

1. decide what you would invest them in (the scheme will offer different options). For example, my AVCs are going into the L&G MT Global Developed Equity Index fund.
2. Work out the rough average annual return. Let's say it's 9%.
3. But you also have to think about inflation- let's say that tends to average about 3%. So you real terms return is 6%.
4. Put everything into a savings calculator such as the MSE one, as a proxy. That will give you a very rough idea of what, on average, you might expect. But NB it's only a rough average, and the actual return you get will go up and down.
5. Putting £100/month into a global tracker for 20 years could give you a pot worth about £46k (real terms) or £67k (nominal). But no guarantees.

I do both.

Things to check about the LGPS-

1. If you pay AVCs, do you have to take your AVCs and DB pension at the same time, or could you (say) access your AVC pot a few years before you start being paid the DB pension.
2. If you pay AVCs, can you use that pot as the tax free lump sum in respect of your total pension (DB and DC)- some schemes allow this and it's a good option.

APCs are very expensive relative to what you get back out… remember that you’re having to pay the employer contribution as well as the employee contribution.

Your LGPS pension is providing you a defined benefit, and AVCs on top provide an opportunity for your AVC investments to grow over time.

It’s for good reason that AVCs are very popular and APCs are not.

I bought some APCs then switched to AVCs. Reasons for me were what I can leave my husband, you can take it tax free provided it's under 25% of the total DB pension pot (take the yearly forecast pay x 20 to work out your nominal pot) and can use anything over for buying APCs when you retire. You have to take the AVC pot at the same time as the main pension. I'm not concerned about the ' it can go up or down' over 20 years it will go up and beat inflation. Flexibility of the AVCs works for me.

Most DB schemes come with a survivor’s/dependants’ benefit although at a reduced level.

DC pensions will come into the inheritance tax net in 2027. If you own a property in the Southeast, chances are this will take up your nil rate band. If you are not married, 40% of your pension fund will go to HMRC with income tax on the rest if you die post 75.