advice re paying pension AVCs

[aw12040]

Hi, looking for advice re AVCs. For background I'm employed at a University and have a final salary (up to 2014) then career average salary to date, and am considering paying AVCs. I'm 61, normal retirement age 67, no plans to retire early. I have some quotes from the pensions administrator. So paying in AVCs of £50 PCM gives and additional annual pension of £125.79, additional lump sum £377.36. Figures for £100 and £150 are respectively £251.57/ £754.72 and £377.36 / £1132.08. Any thoughts on this?

With interest rates as they are, I'd pay in the £150pm - assuming no reason to think you'll have a short retirement phase of life. It's a decent amount of extra pension.

So with 6 years to go before retirement - £50pm will mean paying in an extra £3,600 so you'll have more money (disregarding inflation and lost interest) if you live to age 92½

With £100pm or £150pm you would reach breakeven at age at pretty much exactly the same point.

About 33% of women live to age 90 but only about 3% reach 100 so the chances are you will probably stop benefiting from this at or very near the breakeven point.

Personally I would put as much as I could afford into a 5 or 10 year regular saving bond - if you find one that restricts withdrawals the interest rate could beat inflation. If you can manage to boost your income with a little part-time earning for your first 5 years of retirement (eg with a bit of tutoring if you are in academia) then you can start drawing down on this savings pot with at least as much extra income as the AVCs would have give you, and chances are there will be money left in the pot by the time you keel over.

Thanks both, that’s helpful.

I am a great believer in AVC's.
Started playing them in my 40's and only stopped when my employer changed my pension. No-one else I worked with did AVC's at the time but a decade or so later it was possible to see what a difference it was going to make to my pension.

I retired mid-50's using all my AVC's to enhance my lump sum, this in turn meant a greater annual pension.

ok, thanks to all who've responded so far. I've now received more info from the pensions administrator re paying in a lump sum rather than monthly payments. Normal retirement date for the workplace pension is actually age 66, state pension at 67.
So if I make a lump sum payment of say £5k (which will need to be spread over 4 months) the additional pension would be lump sum £982.96 and £327.65 per annum. So the payback time would be 12.3 years or at age 88. Any more thoughts or comments on this? Thanks in advance.

I think it depends on your money habits. I'm not great at saving and keeping chunks of savings. But I'm good at using a steady income to meet my needs. So I prefer to make sure I have a good income in retirement as I know that's what will suit me better.

If I put it in a savings account, I'd either dip in or not save or use it less wisely.

Have you paid off your mortgage and have you saved your ISA allowance this year?

Hi @aw12040. What will the main pension give you in retirement ? Bearing in mind you have the State Pension as well. I know quite a few people who paid into AVC's only to find that in retirement they we income rich but asset poor. And the income is being taxed at 20%.....and in some cases 40%.

Maybe look at putting the money into an ISA instead (if you've not used up your annual.allowance). In retirement you can draw this out tax free.

Thanks to all who have replied. Mortgage paid off and ISA allowance for this year is used. Main pension about £20k P.A. Plus state pension.

Is this USS or TPS? It mainly sounds as if it is USS, is that right?

Actually it's UM (for Manchester)SS, similar to USS

If you've maxed out your ISA, and believe you will do so every year until retirement, then I'd not argue against further pension provision. However, it might be a good idea to look at a private pension rather than AVC's. Buying further "fixed" income when you will be receiving in excess of £30k pa in retirement may not be the best option. A private pension / Sipp can be converted into a Flexi-Access Drawdown plan in retirement which (as the plan says) can give you some flexibility around how & when you take the benefits. Also can leave the entire fund to your beneficiaries (if you have any).upon your death.

Ah OK. I was going to say that in USS the AVC goes into the 'investment builder' part of the pension (essentially a DC pot) which can be used to purchase extra DB pension, but need not be. I have no idea whether that is also the case for the scheme you are in.

Assume you understand that the AVC payment is made before tax. So, for example, if you make an AVC of £100 per month and you are a higher rate tax payer (big assumption I know) then you only lose £60 from your pay.

I have just taken early retirement and pumped as much as I could into my USS pension in the lead up.

I don't think I expressed myself very clearly. Your comment:

"So if I make a lump sum payment of say £5k (which will need to be spread over 4 months) the additional pension would be lump sum £982.96 and £327.65 per annum. So the payback time would be 12.3 years or at age 88. Any more thoughts or comments on this? Thanks in advance."

isn't correct because if you didn't pay the £5k into your pension then you would have paid tax on it, so you should work out how long it would take you to get the taxed amount back, rather than the 5K back.

Hope this is comprehensible :-)

But the OP would be paying tax on the income when she retires.

20% tax relief going in, then 20% tax on the way out

….so the £5k lump sum AVC would actually be £4k for a normal rate taxpayer with tax relief, but would be taxed at the applicable rate at retirement. That’s my understanding. Am i right?

Yes, the £5k lump sum AVC would mean that you had £4k less to spend now. I am only familiar with USS pensions, but I am taking a large lump sum tax free, so although I will pay tax on my monthly pension amount at the appropriate rate, I am not paying tax on the lump sum.

I would pay as much as I can into the AVCs in order to receive the tax relief ( while you can)

I did AVCs on and off since my early 20s. Retired now. In final year I put 50% of my salary into AVC, then got it back, tax free as part of my 25% lump sum. I still can't get my head around why people don't do this ... I ran payroll so I knew that nobody else had done this in 25 years in my organisation's.