AVC advice please

[stroller]

Hi

I am thinking of opening an AVC, for the simple reason of putting anything over 30k into it if VR comes along, pensions sent me a guide to opening an AVC but to be honest i don't understand which option to go for, I want to put any future lump sum in it with the minimum risk involved.

Your opinions on which AVC to go for would be most helpful, and is it a good idea to open one with the aim of putting around £20k surplus VR money into it?

[RobertT]

The main aim of a RM AVC is fund some or all of the tax free lump sum without commuting any of your main scheme benefits. Although you can also:

Take out an annuity
Drawdown the money over a period of time
Take it all out as cash

With all the 3 above options you can take a 25% tax free lump sum, but the remainder is treated as income and will potentially be taxed. And you may have to transfer your money somewhere that enables you to do what you want, as I don’t think Zurich currently allow you to.

If you want to go the pension route but don’t want an AVC, you could open a personal pension or a SIPP. They have the same 3 options as above but can’t be used to fund your RMPP lump sum.

The main plus point with pensions is that you get tax relief on your payments, so for every £100 you put in, you get another £25 from the government assuming you’re a basic rate taxpayer. Although they are potentially taxable on the way out, depending on your overall income. Plus the earliest you can usually touch your money is aged 55.

Another option might be an ISA or other savings vehicle. You won’t get any ‘free money’ but it won’t be taxed on the way out either. You also have complete control over when you take it.

As for investment choices:

The RM AVC’s give you a very limited choice of funds. At your age I would have thought the cash fund or the cautious fund are probably the ones to go for, although that would depend on how long you plan to keep the money in there to some extent.

A personal pension or a SIPP will have lots more investment choices, potentially thousands! And is probably not for someone who doesn’t want too much risk. Although you can still invest into safer funds via this route.

Equity ISA’s have similar investment choices to personal pensions/SIPPs.
While most cash based savings just pay a percentage as interest each year.

So in summary to make the most of your money I would say that AVC’s are a good move, due to the tax advantages and the ability to use them to fund the tax free lump sum. Although these things will always depend on circumstances and what you plan to do with the money to some extent.

Personally I’ve paid AVC’s for over 20 years and have also got a personal pension and ISA’s tucked away. Should VR come my way (as long as it’s the right time for me) I will probably put the taxable amount over £30k in either AVC’s or the personal pension. The proceeds from the RM shares will probably go in aswell when they’re sold.

[stroller]

RobertT

What can I say,every time I ask for advice you always reply with a most helpful and detailed reply which I really found most helpful and very interesting.

I will get onto pensions in the next couple of days to get the ball rolling

Thanks again

Stroller

[stroller]

RobertT

Just a quick question if you don't mind? I looked at the cash and cautious funds on the pensions website and as you say at my age they look good, i want to take the AVC with as much as I can get tax free lump sum so what one should I choose?

[RobertT]

I’m not really sure I can answer that with any certainty because ultimately I’m a postman not an IFA. But there is nothing stopping you from choosing more than one of the available funds if you want to.