AVCs - internal or external?

[chrissyr]

We plan to start paying some avcs in my wife's local government pension scheme so as to be able to take in 3 to 5 years time as a lump some.
Her pension is a bit odd that she will get pension and a lump sum as the standard package - the avcs are to try and get the full 25%.
They sent her a form and seems that it will be held with Standard Life and she is to pick the funds.
Looking at their charges they start 1% pa and go up from there. That seems a bit high.
So could we just open a low cost sipp and pick the funds there? She would have to do a tax form each year.

Does anyone know how you would then take the sipp money as part of the allowed 25% lump sum of the entire pension?
Or is it just easier to pay the high commissions to keep it simple?
For info the standard lump sum would be around £20k and the sipp could be up to £45k to stay within the 25% limit.
Thanks for any info

[DrBunsenHoneydew]

What you are describing is not really a SIPP. It is an in-scheme/in-house AVC plan subcontracted to an insurance company (Std Life, Prudential and Equitable Life were the big players in this), and the benefits of these are usually bound to the employer scheme, e.g. can't take the AVC until yow draw the employer pension too. Free-standing AVCs are also possible, as are the more flexible SIPPs that are totally unconnected to the job.
The 1% charge for the AVC will include all the scheme admin as well as the fund charge. In a SIPP you would have to pay a fund charge and the SIPP provider fee on top - may or may not be cheaper overall.

[tjh290633]

You need to check, but my understanding is that you cannot touch an AVC, tied to a company scheme, until the company pension is taken. Check the rules, because a low-cost SIPP might be better for her.

TJH

[chrissyr]

Thanks for replies.

We plan to take the avc when the pension is taken - it was a way on increasing the lump sum available. Just not sure how you would tell tax that it is part of a 25% lump sum of a stand alone pension. Assume SL and lgp sort this out with them (so included in the charges as you say) - maybe their charge is reasonable.

C

[DrBunsenHoneydew]

Thanks for replies.

We plan to take the avc when the pension is taken - it was a way on increasing the lump sum available. Just not sure how you would tell tax that it is part of a 25% lump sum of a stand alone pension. Assume SL and lgp sort this out with them (so included in the charges as you say) - maybe their charge is reasonable.

C

In practice you will start the LGPS first and get a certificate of what's been used up of your Lifetime Allowance and Lump Sum. Then when you subsequently contact Std Life to cash in the AVC they will ask what you got from LGPS and tell you what options you have for further lump sum and taxable remainder. You can't cash the Std Life first but can delay taking the AVC for as long as you wish after the LGPS. You will act as the middleman between them.

[mearnsfool]

Nothing new here.

I left a major company in 2010 with a final salary pension.

Using HMRC rules I multiplied may annual pension by 20 to calculate the capital value of the pension.

I did not want to commute any of my final salary pension.

I then said 75 % of my final pension pot is the capital value of my final salary pension.

Say for example my annual pension was £10,000 p.a. That gave a capital value of my final salary pension of £200,000.

I then said this capital value of my final salary pension is 75% of my final pension pot.

I would take the final salary pension as an annual pension.

The remaining company AVC would be my 25% tax free lump sum my AVC pot was £66,666. Final pension pot £266,000.

I then added funds into my AVC in the last three years of my employment with that employer to get the AVC to £66,000.

Therefore I could take 25% of my final pension pot as tax free cash in this example £66,000 which is the value of my total AVC.

I do not think you can do that if the other pension savings are outside the employers pension schemes.

With regards to the original poster saying his wife's local government pension is a bit odd. Please do your research before posting such a statement. Up to around 2009 or so I will let the original poster do some research on that fact, virtually all civil service and local government pensions has a up front tax free lump sum paid when the annual pension started.

Again I will let the original poster do their homework on that as well.

[Alaric]

Up to around 2009 or so I will let the original poster do some research on that fact, virtually all civil service and local government pensions has a up front tax free lump sum paid when the annual pension started.

Public Sector schemes used to be structured on the premise that the retirement benefits would be 1/80 th of the final salary for every year worked plus 3/80ths of the final salary as a tax free cash sum. Private sector schemes structured as defined benefits would offer 1/60th of the final salary for every year worked alongside an option to forego some of the income for an immediate cash sum.

There was flexibility between income and immediate cash in private sector schemes but not in public sector ones.

[DrBunsenHoneydew]

There is flexibility in the public sector defined benefit schemes that allow you (if you wished) to take more tax-free lump sum than any minimum lump sum (typically 3/80 of salary as Alaric says), up to effectively 25% of the deemed pot value. If you have an 'in-scheme' AVC as the OP chrissyr proposes, this can be combined with the DB pension for the calculations (as mearnsfool says).

[Chrysalis]

It depends on the particular scheme rules in the public sector. For example, in the NHS 1995 scheme (now closed), the lump sum is 3 times the pension, and cannot be increased to my knowledge. In the more recent schemes (the now closed 2008 and the current 2015 scheme) there is some flexibility to exchange pension for lump sum.

[DrBunsenHoneydew]

It depends on the particular scheme rules in the public sector. For example, in the NHS 1995 scheme (now closed), the lump sum is 3 times the pension, and cannot be increased to my knowledge. In the more recent schemes (the now closed 2008 and the current 2015 scheme) there is some flexibility to exchange pension for lump sum.

I am in the 1995 NHS scheme (which is still open to contributions from older existing members, but not to new or young existing members, as is the 2008 scheme) and have the option to increase the lump sum by commuting pension at the rather poor rate of £1:£12.

[chrissyr]

Thanks for the replies has answered the question - internal AVC will allow us to take them as part of the 25% limit.

I only said the lgp was 'odd' as my private db pension just had a pension and the avcs was the lump sum part. Plus the avcs are a lot simpler (just 3 types to choose from rather than the hundreds of funds in the SL one). And no charges (though I suppose they are just bundled in the returns)