Local Government Pension AVCs worthwhile?
|Retirement | Occupational Pension
Asked by crowcork, submitted
09 January 2011.
I work in Local Government and I pay into an Occupational Pension. I am 56 years of age and I was wondering if I should join the AVC scheme run by my pension provider, which is provided by the Prudential. I have been working with same employer for 37 years and I have paid into the pension for the same period. Please advise me.
Answered by Justin on 12 January 2011
An Additional Voluntary Contribution scheme (AVC) is one of several ways to top up your pension. It usually involves paying contributions into a pension fund which is then invested. When you retire the money is used to buy an income for life via an annuity.
On the plus side you'll enjoy tax relief on the contributions: pay in £80 and the taxman will make this up to £100, plus you can reclaim a further £20 if a higher rate taxpayer. However, when you eventually receive the pension income it's taxable and it might not be very much if investment performance and/or annuity rates are poor.
You should also have the option to buy extra annual pension within the Local Government Pension Scheme, either via ongoing monthly contributions, called Additional Regular Contributions (ARCs), or a lump sum. The cost varies between schemes and depends on your age, sex, time until retirement and whether a dependant's pension will be paid on your death.
Your scheme administrator can provide a quote, but as a guide I'd expect the cost (before tax relief) to be around £50 per month, or about £3,200 if a lump sum, per extra £250 of annual pension at retirement for a male aged 56 retiring at 65. The advantage of this route is that there's no investment risk on your part, you'll know exactly how much extra pension you'll receive at retirement.
The Prudential AVC scheme offers an ok range of funds with annual charges of around 0.65% - 0.75%, which is very competitive. But, as mentioned earlier, the amount of extra pension you'll receive depends on investment performance and future annuity rates - which means risk.
If you're comfortable taking some investment risk but want a wider choice of investment funds than offered by the AVC then a stakeholder or self-invested personal pension might fit the bill. However, both will likely be more expensive than the AVC, with Stakeholder annual charges typically around 1% a year and the cheapest SIPPs charging around 1.5% a year for most mainstream funds.
Of course, you don't need to use a pension to save towards retirement. For example, Individual Savings Accounts (ISAs) offer access to similar investment funds but with more flexibility, as you can access the money whenever you want. There's also no tax on income, which could be useful during retirement, although unlike pensions there's no initial tax relief on contributions.
Or, if you have a mortgage or other outstanding debts, then maybe you'll want to clear those as the interest charges are likely more than you could otherwise safely earn on the money.
Hopefully this gives you some food for thought. Your decision should really depend on how much risk you're comfortable taking and whether flexibility is important to you. And, if you feel you have sufficient pension provision already, then maybe you'll want to use your spare income for something other than boosting your pension.