Selling AVC units

[Alexei]

Posting here on behalf of a friend.

According to the plan administrators, they [my friend] cannot make any payments or contributions to their AVC's [Bonusplan & Flexiplan, via Scottish Widows] as they've left the company. The policy is selling a tiny decimal of units per month to cover the costs of running the plan. With no contributions being made, and selling of units to cover costs, surely this is not a beneficial situation for them, as their share of units is slowly being eroded. They have 30+ years of work left before retirement!

They called up Scottish Widows who said they couldn't make any payments to either policy (or combine them for ease) and the only alternative would be to transfer the AVC's out, but best seek financial advice first. Their intention was to make small monthly contributions (probably no more than £5) to cover the ongoing charges and then some. I found the information odd but am of the understanding paying for investment charges with holdings is generally not a good idea, especially if you're not making contributions.

Is it something to be concerned about long term? The units are sold to raise around £1 per month for ongoing charges. They're annual statement shows their AVC funds have grown X & Y amount, with the charge amount deducated [but not shown], but despite this, it doesn't seem correct (logical) to me that it is a sustainable practice for the next 30 years considering there are no contributions being made, and that the only alternative is to transfer their AVC's to their current pension provider (their current provider only allows transfers within so many months, which my friend is now outisde the window) or other (SIPP?).

[RobertT]

They are Royal Mail AVC's and your friend has left the company, so no further contributions are allowed I'm afraid.

You don't say which fund/s your friends AVC's are invested in, but a quick look at the performance of them, would suggest the average annual growth is going to be higher than the charges SW take.
You can see the performance info here: https://digital.feprecisionplus.com/cor ... ory=2rmp62
I believe the highest charge rate is 0.631% which is for the Balanced Fund.

I no longer pay into Flexiplan, although I am still employed by RM.
The last few months haven't been great for the vast majority of investments, but since I stopped paying in back in 2019, overall I've still seen the value of my Flexiplan increase. I would expect that to continue over the longer term.

Transferring out their AVC's may be better in terms of making their money grow, especially if there's more cash going in. But leaving them where they are, to perhaps take 100% tax free along with NRA60/65 benefits, might also be the better choice.
That's something that will depend largely on personal circumstances, plans, choices, etc and can't really be answered on an anonymous internet forum.

[Alexei]

Hi Robert, and thank you for your response, I'll relay the information to them. Both their Bonusplan and Flexiplan are invested in the growth fund. I can see from the link you provided that the performance has been -0.22%, but I think its only referencing recent performance compared to the previous 24h / 7 days / month.

I'm a tad more financially and tech astute than my friend, so they often come to me for some insight before delving deeper into the realms of professional financial advice, but I admittedly was confused by the situation (and still think its a bit unfair that they can't at least cover ongoing charges via DD or some other payment method).

So it sounds like your Flexiplan will be the same, where units are sold monthly to cover running costs. I did mention that I think as long as the fund grows (which they generally do over the long long term) then they should really be ok, but second guessing myself that if SW are selling units to cover charges, then hypothetically there can be a situation where their units will be eroded entirely. It would take a very long time as the charges are based on a percentage of their holding rather than a fixed £ value, but still possible.

I suppose the best analogy would be that growth would see the pie growing larger, whereas units say how much of the pie you get. If their share/units of the pie has reduced over the past year, but the pie has also grown, then its not a disastrous situation as they may actually end up with a little bit more than they had before. Albeit not as much if they were still contributing but given the circumstances they can't do anything about it unless transfer it. 50% of 100 is the same as 25% of 200. Grossly oversimplified but purely for the benefit of illustration.

Am I understanding this correctly, nothing really to worry about in the long term and let the fund do its magic?
Edit: I suppose the only thing to worry about is crippling inflation chipping away at the value of their pension, but this is a consequence of current market conditions which everyone experiences, and they may be relatively sheltered assuming the fund will grow and they have 30+ years of work left.

[RobertT]

Hi Robert, and thank you for your response, I'll relay the information to them. Both their Bonusplan and Flexiplan are invested in the growth fund. I can see from the link you provided that the performance has been -0.22%, but I think its only referencing recent performance compared to the previous 24h / 7 days / month.

Click on the icons on the right hand side to get longer term past performance!

I'm a tad more financially and tech astute than my friend, so they often come to me for some insight before delving deeper into the realms of professional financial advice, but I admittedly was confused by the situation (and still think its a bit unfair that they can't at least cover ongoing charges via DD or some other payment method).

It's simply a case of not being a RM employee any more. Payments into Flexiplan and Bonusplan have to be paid via RM wages.
There is no option to pay SW directly, unless the money is transferred into another pension arrangement with them. Or else transferred to another provider altogther.

So it sounds like your Flexiplan will be the same, where units are sold monthly to cover running costs. I did mention that I think as long as the fund grows (which they generally do over the long long term) then they should really be ok, but second guessing myself that if SW are selling units to cover charges, then hypothetically there can be a situation where their units will be eroded entirely. It would take a very long time as the charges are based on a percentage of their holding rather than a fixed £ value, but still possible.

I suppose the best analogy would be that growth would see the pie growing larger, whereas units say how much of the pie you get. If their share/units of the pie has reduced over the past year, but the pie has also grown, then its not a disastrous situation as they may actually end up with a little bit more than they had before. Albeit not as much if they were still contributing but given the circumstances they can't do anything about it unless transfer it. 50% of 100 is the same as 25% of 200. Grossly oversimplified but purely for the benefit of illustration.

Am I understanding this correctly, nothing really to worry about in the long term and let the fund do its magic?
Edit: I suppose the only thing to worry about is crippling inflation chipping away at the value of their pension, but this is a consequence of current market conditions which everyone experiences, and they may be relatively sheltered assuming the fund will grow and they have 30+ years of work left.

There are always periods when markets go down and we're experiencing one now! But over the longer term, average growth is likely to be higher than the charges levied, so it's highly unlikely the number of units will be eroded completely.

But there is something else you're missing, which is actually the most important thing about pension saving. Which is that the units held in the fund produce an income - the dividends!

That income will be automatically reinvested into the fund to buy more units. Over the course of time that income will buy more and more units and so on – it's what's known as compounding.
It's what makes your money grow!

The final point is the method of paying the charges by selling units.
Although I've stopped paying into Flexiplan, I still pay into Bonusplan and as far as I'm aware, they sell units to fund the charges with that aswell. I don't think there's a little pot of cash they can dip into.