Finance question

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Herts Clarets
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Finance question

Post by Herts Clarets » Wed Jan 06, 2021 8:26 pm

I know there are some posters on here that are well versed in financial matters so I seek any advice from knowledgeable posters.

I am a member of the LGPS with my current employer, a County Council. We had a presentation on Shared Cost AVCs, which is a separate scheme that runs alongside your pension. The benefit is that contributions after tax and NI free via Salary Sacrifice, meaning a 100 contribution costs 68.12 due to tax and NI relief.

When the time comes for retirement, the AVC pot is paid as a tax free lump sum alongside your pension. I have read a fair bit on this, one of the criticisms is that the funds didn't show the best growth, though you can choose which funds and level of risk to invest in.

So my question really is, given the actual cost of the contributions against the amount that is put into the pot (31.88gain immediately for every 68.12 paid in) is this as good an investment as it is sold as being?

dpinsussex
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Re: Finance question

Post by dpinsussex » Wed Jan 06, 2021 8:30 pm

50% growth isn't a bad bet and that is before any movements in the pension fund.
LGPS tend to be quite cautious in nature so you may be able to find better in the market place.

I used my work place pension and pumped in as much AVC as I could afford. Unfortunately got divorced and she took half of the pension. Gutted given the advice is to invest while you are young in order to maximise the growth potential.

I am no expert though and recommend you take proper Independent Financial Advice

Good luck with it.

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Re: Finance question

Post by Herts Clarets » Wed Jan 06, 2021 8:33 pm

If I go outside the LGPS then you cannot get tax and NI relief, as far as I am aware

dpinsussex
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Re: Finance question

Post by dpinsussex » Wed Jan 06, 2021 8:34 pm

Herts Clarets wrote:
Wed Jan 06, 2021 8:33 pm
If I go outside the LGPS then you cannot get tax and NI relief, as far as I am aware
That is how I understand it too

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Wed Jan 06, 2021 8:39 pm

As I see it for every pound I pay in, 46.8% is added at no cost to me. To me seems like a great deal....

Spike
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Re: Finance question

Post by Spike » Wed Jan 06, 2021 9:15 pm

Great deal tax wise just watch fund it goes in . Make sure it matches your attitude to risk and has low charges
The only way it can be a bad deal is if you pick a dog of a fund

clarethomer
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Re: Finance question

Post by clarethomer » Wed Jan 06, 2021 9:17 pm

Herts Clarets wrote:
Wed Jan 06, 2021 8:33 pm
If I go outside the LGPS then you cannot get tax and NI relief, as far as I am aware
That is not true entirely.

You can contribute to a Free Standing AVC or another personal/stakeholder pension.

https://www.lgpsmember.org/arm/already-member-extra.php

You will not get the NI saving if you go external as your pay will be higher and the contribution isn't taken prior to NI and Income Tax deductions.

However by investing in an FSAVC or PP/SHP then your tax relief is based on 20% added by the government once you have invested. If you are a 40% tax payer then you need to claim the additional 20% back via a tax return.

The pay off to do this is that you have more freedom with your investment choices.
This user liked this post: dpinsussex

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Wed Jan 06, 2021 10:54 pm

Just to add to what people have said.
Yes the initial tax relief is very good.

Yes you can get your tax relief if you set up a private AVC or a SIPP. But no NI as has been said.

There are several platforms you can do that with.

There are two types of platforms, old style insurance companies who have moved from just insurance, eg Prudential.

The other type is the new type that services private investors who want great choice and easy access. Eg Hargreaves Lansdown.

Insurance platforms tend to be limited in the investment choices and some use use mirrored funds and can be expensive in comparison eg Pru.

Investor platforms have greater choice and by the nature of the competition tend to be cheaper.

So my drawdown is with Pru and my SIPP is with HL and as an example I will use the Baillie Gifford American fund.
In my SIPP, HL, the American fund costs 0.51% per year and HL charge 0.45%.
In the Pru the mirrored fund costs 2% per year, a mirrored fund is the Pru employing 4 fund managers to try to match the actual performance of the actual BG fund. They are always worse by about 10-20% per year.


The first thing I would look at is how many funds are available on the AVC platform you are being offered, they are normally very restricted. Have a look at how they have performed over the last five years. My Aviva AVC at work had 15 funds and they were doing 3-5% a year at best.

On a private platform you could invest in a tracker fund like the FSTE250 or the S&P500 and get steady growth of 10% per year with very low costs at 0.2-0.25% per year and a platform cost of around 0.45% or less.

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Wed Jan 06, 2021 11:06 pm

Two graphs as examples FTSE250 and S & P500, over a fairly long term. If you are 20-25 years away from retirement a great option.

First one is S & P 500.
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ClaretLoup
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Re: Finance question

Post by ClaretLoup » Wed Jan 06, 2021 11:16 pm

One thing you need to consider about AVCs is that they are very keen to sell them to you because of the tax relief, however when you draw your pension you have to pay tax on your income derived from the sum that you have saved.

I am not sure how your AVC is set up but the one I had they chiselled off 0.5% every year of your cumulative sum saved, not just the amount you ut in every year. It doesn't sound a lot but over the years it builds up and does erode your sum available at the end.

Personally I didn't think they were all that they were cracked up to be and I wish I had put the money in a self managing ISA from which my annual return is 6% although funds are riding high atm.

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Thu Jan 07, 2021 7:43 am

ClaretLoup wrote:
Wed Jan 06, 2021 11:16 pm
One thing you need to consider about AVCs is that they are very keen to sell them to you because of the tax relief, however when you draw your pension you have to pay tax on your income derived from the sum that you have saved.

I am not sure how your AVC is set up but the one I had they chiselled off 0.5% every year of your cumulative sum saved, not just the amount you ut in every year. It doesn't sound a lot but over the years it builds up and does erode your sum available at the end.

Personally I didn't think they were all that they were cracked up to be and I wish I had put the money in a self managing ISA from which my annual return is 6% although funds are riding high atm.
You can take the AVC as a tax free lump sum, providing it doesn't form more than 25% of your total pension pot, providing you take them both together.

After doing some more reading, i can see why the company are pushing this scheme. As it is done via salary sacrifice, it lowers the wage bill and although they will pay the difference into the SCAVC scheme, there is no employers NI contribution. So basically the more an employee takes in salary sacrifice and places into the SCAVC the less the employer pays in NI contributions.

barba
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Re: Finance question

Post by barba » Thu Jan 07, 2021 8:01 am

Was there no focus on the benefits of drawing a lump sum from the AVC and not the main scheme?

If the scheme has a low commutation factor which is likely then the benefits of this are more focal imo than salary sacrifice and investment returns

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Thu Jan 07, 2021 8:05 am

The focus was on taking retirement early, the reduction in the LGPS by doing so and the SCAVC filling that gap.

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 9:40 am

Herts Clarets wrote:
Thu Jan 07, 2021 8:05 am
The focus was on taking retirement early, the reduction in the LGPS by doing so and the SCAVC filling that gap.
What’s the name of the company they are pushing, I can have a look at it if you want?

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Thu Jan 07, 2021 10:00 am

AVC Wise, which leads into Prudential and Standard Life policies i think

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 10:13 am

ClaretLoup wrote:
Wed Jan 06, 2021 11:16 pm
One thing you need to consider about AVCs is that they are very keen to sell them to you because of the tax relief, however when you draw your pension you have to pay tax on your income derived from the sum that you have saved.

I am not sure how your AVC is set up but the one I had they chiselled off 0.5% every year of your cumulative sum saved, not just the amount you ut in every year. It doesn't sound a lot but over the years it builds up and does erode your sum available at the end.

Personally I didn't think they were all that they were cracked up to be and I wish I had put the money in a self managing ISA from which my annual return is 6% although funds are riding high atm.
Each companies platform will charge a fee per year, however they do have certain advantages.
The example I used above with Baillie Gifford can be invested directly avoiding a platform fee. However they charge a 5% initial investment fee which Hargreaves Lansdown get waived if you invest on their platform.

No matter where you turn you are going to be charged something.

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 10:16 am

Herts Clarets wrote:
Thu Jan 07, 2021 10:00 am
AVC Wise, which leads into Prudential and Standard Life policies i think
I know the Pru platform fairly well, that’s where my drawdown pension is.
SL I know a little about as the missus has a small private pension and my Mums money is on that platform.

I will have a look.

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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 12:26 pm

Ok, so I have had a good google around and AVC wise are very good at hiding where your money is going to go, probably until your enrolled. Having looked at several council AVC joining documents I can only see Prudential mentioned as an available platform. The AVC site says using companies like Prudential and Standard Life, it does not state which they use. So my guess is it the Prudential. I think that’s an important question to ask your employer.

I think the Pru is expensive in the extreme, to be honest and if I had a choice I would move my pension pot to another platform but it’s the only one my Financial advisor uses.

I have pictured the example of Baillie Gifford American as an example. The Pru fund is I said a mirrored fund, that’s 4 fund managers trying to buy the same funds as Baillie Gifford and charging you twice as much for being worse at it.
First the actual fund, charges 0.51% per year and on the HL platform you pay 0.45% per year on top.
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Then we have the Pru fund which charges 1.96% per year, but no platform fee. If you are lucky enough to amass say £50,000, you are going to pay £500 per year more to the Pru.
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Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 12:34 pm

Quick two questions. 1, how old are you?
Sorry to ask this but do you understand compound interest?

Off for a blood test so will not be around for a couple of hours. Will answer any questions later.

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Thu Jan 07, 2021 12:56 pm

1.52
2. I believe so yes.

Thanks for the help so far. There was huge focus in the webinar on the tax end NI efficiency of the scheme with very little information on where your money would be invested and the sort of returns that have been achieved previously. Hence me asking the question on here as i do know there are some very financial savvy people who post and have experience of investments.

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 4:33 pm

Herts Clarets wrote:
Thu Jan 07, 2021 12:56 pm
1.52
2. I believe so yes.

Thanks for the help so far. There was huge focus in the webinar on the tax end NI efficiency of the scheme with very little information on where your money would be invested and the sort of returns that have been achieved previously. Hence me asking the question on here as i do know there are some very financial savvy people who post and have experience of investments.

1/. So based on your age it’s a fairly short term investment in pension terms.
2/. That’s good a lot of people don’t.

The website is all based around getting you to enrol due to the tax advantages, which are true and correct. However it looks like it’s going to the Prudential.

Personally if you look at the AVC compared to a SIPP. There’s not much difference, AVC, work are going to sort out the payment and the tax and NI. You just choose which funds you want it to go in. Choosing funds is your choice no matter the platform.

SIPP, you would set up a direct debit from your bank, the platform supplier would claim the tax back for you and add it to your account.

The cheapest option on the market is Vanguard. However the minimum investment is £100 per month. But for that they charge 0.17% and the FTSE250 tracker costs 0.10% and the S & P500 tracker is 0.07% per year.

They also do managed retirement funds, which I will post screenshot of.
Therefore if you were going to invest you could reduce charges on your investments by 1.7%.

Vanguard returns in the past have also been significantly better.

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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 4:39 pm

Most providers do this type of managed fund , this example is retirement in 2030.
Charges are slightly higher as it’s managed.
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Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 4:42 pm

The S & P500 example is below, very low cost (passive) index tracker.
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Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 4:46 pm

A friend of mine who started investing 18 months ago decided on using Vanguard.

He bought S & P 500, FTSE250 trackers and some Gov bonds.

He saw a 16% return in the first 12 months and is around 20% after 18 months. You can see the charts bear that out.

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Re: Finance question

Post by barba » Thu Jan 07, 2021 5:14 pm

Herts Claret

You can find specifics about the Prudential AVC for your local authority and employer here https://www.pru.co.uk/rz/localgov/

I tend to find with these scheme types the fund choice will be limited but the charges due to economies of scale will be reasonable. I'd expect the average to be certainly under 1% and probably around 0.6% ish.

Aside from the authority keeping their NI saving it is pretty good and far more beneficial from a tax saving perspective than contributing directly in a SIPP. Also the ability to use the AVC to fund your lump sum and not commute from the main scheme is something, as I mentioned earlier as really valuable

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Thu Jan 07, 2021 5:34 pm

Any questions???

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Thu Jan 07, 2021 8:02 pm

Probably! Thanks for all this. I will have a proper look at work tomorrow.

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Re: Finance question

Post by Herts Clarets » Mon Feb 01, 2021 12:18 pm

Bumped this one backup to ask Lowbank another question - can you let me have an email address to send you something that i don't want to post on the board. As soon as i have it you can delete your email. Thanks in advance

IanMcL
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Re: Finance question

Post by IanMcL » Mon Feb 01, 2021 3:12 pm

Herts Clarets wrote:
Wed Jan 06, 2021 8:26 pm
I know there are some posters on here that are well versed in financial matters so I seek any advice from knowledgeable posters.

I am a member of the LGPS with my current employer, a County Council. We had a presentation on Shared Cost AVCs, which is a separate scheme that runs alongside your pension. The benefit is that contributions after tax and NI free via Salary Sacrifice, meaning a 100 contribution costs 68.12 due to tax and NI relief.

When the time comes for retirement, the AVC pot is paid as a tax free lump sum alongside your pension. I have read a fair bit on this, one of the criticisms is that the funds didn't show the best growth, though you can choose which funds and level of risk to invest in.

So my question really is, given the actual cost of the contributions against the amount that is put into the pot (31.88gain immediately for every 68.12 paid in) is this as good an investment as it is sold as being?
It is brilliant! Takes you out of higher tax too, so invest what you can. Easy means of reduces ones taxes for use by oneself!

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Mon Feb 01, 2021 11:24 pm

Edited
Last edited by Lowbankclaret on Tue Feb 02, 2021 11:09 am, edited 1 time in total.

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Mon Feb 01, 2021 11:24 pm

Edited
Last edited by Lowbankclaret on Tue Feb 02, 2021 11:08 am, edited 1 time in total.

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Re: Finance question

Post by Lowbankclaret » Mon Feb 01, 2021 11:25 pm

Herts Clarets wrote:
Mon Feb 01, 2021 12:18 pm
Bumped this one backup to ask Lowbank another question - can you let me have an email address to send you something that i don't want to post on the board. As soon as i have it you can delete your email. Thanks in advance
Answered

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Tue Feb 02, 2021 7:37 am

Lowbankclaret wrote:
Mon Feb 01, 2021 11:25 pm
Answered
I have tried to send an email both from a work and personal email address and both have been rejected....

Lowbankclaret
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Re: Finance question

Post by Lowbankclaret » Tue Feb 02, 2021 10:51 am

Herts Clarets wrote:
Tue Feb 02, 2021 7:37 am
I have tried to send an email both from a work and personal email address and both have been rejected....
You need to use both answers, I split it up to try to stop some spam emails.
Apologies

Herts Clarets
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Re: Finance question

Post by Herts Clarets » Tue Feb 02, 2021 11:09 am

Lowbankclaret wrote:
Tue Feb 02, 2021 10:51 am
You need to use both answers, I split it up to try to stop some spam emails.
Apologies
No problem, sent it now.

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