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Preservation of AVC value before retirement

Including Financial Independence and Retiring Early (FIRE)
Plutus
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Preservation of AVC value before retirement

#124771

Postby Plutus » March 14th, 2018, 11:57 am

Good morning.

I won’t be retiring for at least 15 years but I’m already over-thinking how I’d manage my additional voluntary contribution (AVC) investments. I’m fully aware that rules will change but I was wondering if anyone could kindly give me some ideas based on current legislation.

Age: 45
Pension: 20ish years accrued in the local government defined benefit scheme (career average since 2014). Plus monthly AVC contributions - 100% Prudential equity funds.
Other investments: A low 5 figure sum in a shares ISA. I plan to increase my contributions over 20 years to give me another option at retirement.

When I am close to retirement my preferred option as of now is to take a lump sum including the entire AVC ‘pot’. How would I ensure that the value of the AVC investments does not fall immediately before I take the lump sum?

There are ‘lifestyling’ options available via the AVC provider, but would it make more sense for me to independently gradually move from 100% equities to money market/index linked bonds etc. over a 5 year period before I retire? Or move e.g. 50% out of equities to less risky assets when I guesstimate that the stock market is at a high?

I would assume that if I moved the AVC investments to a SIPP that I would have to cash in the investments and repurchase depending on my investment strategy.

How have other people retained the value of their AVC contributions?

Thank you.

Alaric
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Re: Preservation of AVC value before retirement

#124792

Postby Alaric » March 14th, 2018, 12:38 pm

Plutus wrote:How have other people retained the value of their AVC contributions?


It's not really an AVC question, more one of how do you guarantee a fixed amount at some point in the near future? The usual answer is that you hold cash or bonds. That's probably easier to customise if you are able to invest in a wide range of assets. That could mean transferring to a SIPP rather than have to use the fund choices offered by an AVC provider.

What you gain in eliminating risk and volatility you lose in potential returns.

OLTB
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Re: Preservation of AVC value before retirement

#124795

Postby OLTB » March 14th, 2018, 12:47 pm

Hi Plutus - I suppose another question is how long will you be investing the AVC assets for once you get to retirement. If you will be buying an annuity with your AVC funds at 60 then a lifestyling system works well. If you wish to keep the assets in a SIPP to generate your own income from age 60 and you have say a further 25 years of life to enjoy (as an example if in good health) then the assets you should be in mostly would be equities (shares or ITs) as over that timescale, they would work best I would think. I wouldn't want to be in bonds and cash for 25 years.

Hope my ramblings may be useful!

Cheers, OLTB.

Alaric
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Re: Preservation of AVC value before retirement

#124796

Postby Alaric » March 14th, 2018, 12:53 pm

OLTB wrote:Hi Plutus - I suppose another question is how long will you be investing the AVC assets for once you get to retirement.


I had the impression the intent was to take the AVC as part of 25% cash with a view to spending it. If it's only to reinvest, there's no particular point in capital preservation based on the retirement date.

OLTB
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Re: Preservation of AVC value before retirement

#124800

Postby OLTB » March 14th, 2018, 1:00 pm

Alaric wrote:
OLTB wrote:Hi Plutus - I suppose another question is how long will you be investing the AVC assets for once you get to retirement.


I had the impression the intent was to take the AVC as part of 25% cash with a view to spending it. If it's only to reinvest, there's no particular point in capital preservation based on the retirement date.


*re-reads original post*

:oops:

What Alaric said...

Cheers, OLTB.

Plutus
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Re: Preservation of AVC value before retirement

#124843

Postby Plutus » March 14th, 2018, 2:54 pm

Thank you for the replies.

According to the pension scheme rules I can take a lump sum from the total value of the defined benefit pension, but I was aiming to only take the entire AVC amount as a lump sum.

My question was to how to preserve the capital that will hopefully accumulate over the next 20 years or so, before I actually withdraw the lump sum. Once I have the cash I would either gift it to my children or invest it in an ISA or SIPP. I have invested in equities as I consider the pension to be ‘bond like’ and my wife would be entitled to half of the pension if I die before her.

It’s a long way off but I’ve been reviewing my plans recently having applied for a job that offers a defined contribution pension. Having done some basic sums it seems that I’m a lot better off staying at my current employer.

mearnsfool
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Re: Preservation of AVC value before retirement

#125156

Postby mearnsfool » March 15th, 2018, 3:16 pm

6 months before retirement my AVC was 80% cash 10% bonds and 10% equities approx.

Over 10 years the bonds gave a small steady increase, they never decreased in value.

Two months before retirement the bonds went down by £3k and the equities went up by £2k.

Therefore bonds that had been a steady performer lost value.

Not a hill of beans but it surprised me.

100% cash would have worked but you would not want that over a number of years as inflation would cut the real value.

Plutus
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Re: Preservation of AVC value before retirement

#125162

Postby Plutus » March 15th, 2018, 3:24 pm

mearnsfool wrote:6 months before retirement my AVC was 80% cash 10% bonds and 10% equities approx.

100% cash would have worked but you would not want that over a number of years as inflation would cut the real value.

Thank you that’s very helpful. I should have perhaps posted the question on the investment strategies board but I was interested to see how people had managed the situation in a practical sense.

I’ll continue as I am for another 10 years!


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