AVCs for early retirement

[pacey]

Hi all,

Can I ask do you all save in AVCs?

I’ve worked for RM for over 35 years, and have never paid in to them. I’m almost done with my mortgage now and I’m saving in the hope I can retire early in about 7 years time. Have I left it too late for AVC’s to be worthwhile?

If I want to retire at 59 and take my NRA60 then and my NRA 65 say the following year, when would I get the AVC money? Would it be a lump sum?

It looks likely that I’m not getting a state pension until 68 if they change the rules next year, so I need to be able to fund myself until that time with my RM pensions and savings. I’m saving to do that now and to get some money in the bank, but I keep reading that AVCs are better because of saving tax/NI - I admit I keep thinking about it, but then not doing anything as I’m worried about tying so much up in pensions if I can’t get to it when I want it. I know I’ll never be rich as I like to keep things simple and like to see my money on the bank!

But I basically want to travel a bit whilst I’m still young enough to hopefully enjoy it, waiting until state pension age when I will be financially better off but will have my best years behind me healthwise isn’t something I want to do if I can help of it!

I’m in section C if that makes any difference (again apologies if I’m asking really stupid questions lately - I try to read it all, but usually end up burying my head in the sand for a while until I feel ready to try looking at it all again!)

[RobertT]

Hi all,

Can I ask do you all save in AVCs?

I’ve worked for RM for over 35 years, and have never paid in to them. I’m almost done with my mortgage now and I’m saving in the hope I can retire early in about 7 years time. Have I left it too late for AVC’s to be worthwhile?

If I want to retire at 59 and take my NRA60 then and my NRA 65 say the following year, when would I get the AVC money? Would it be a lump sum?

Unfortunately you can't pay into RMPP AVC's(Bonusplan & Flexiplan) anymore as it's now a closed scheme, therefore you can't add to the Age60 and Age65 benefits you've already got.

But you can pay into the lump sum booster(a no brainer) and the AVC's, via the new RMCPP instead.
They either have to be taken with the main benefits or else transferred out to a personal pension.

It looks likely that I’m not getting a state pension until 68 if they change the rules next year, so I need to be able to fund myself until that time with my RM pensions and savings. I’m saving to do that now and to get some money in the bank, but I keep reading that AVCs are better because of saving tax/NI - I admit I keep thinking about it, but then not doing anything as I’m worried about tying so much up in pensions if I can’t get to it when I want it. I know I’ll never be rich as I like to keep things simple and like to see my money on the bank!

Pensions are brilliant ways to save due to the tax breaks and any employer contributions. They beat other savings vehicles hands down.

There are no plans in place to increase state pension age to 68 before the mid 2040's.
The next state pension age review isn't due to take place until 2029 and previous governments have ignored the last two reviews which recommended bringing the age forward.
There's currently a rule in place that any major changes to state pension age will be communicated at least 10 years in advance.

The minimum access age for other pensions is due to increase to 57 from 2028 and stay at 10 years before state pension age.

All of which has the potential to change, pending alternative government policy.

But I basically want to travel a bit whilst I’m still young enough to hopefully enjoy it, waiting until state pension age when I will be financially better off but will have my best years behind me healthwise isn’t something I want to do if I can help of it!

I’m in section C if that makes any difference (again apologies if I’m asking really stupid questions lately - I try to read it all, but usually end up burying my head in the sand for a while until I feel ready to try looking at it all again!)

The best time to save for your retirement is now and the earlier now is, the better.

[pacey]

Thank you so much for taking the time to reply to me Robert.

So I’ve already invested in the Lump Sum Booster, just not the AVCs.

I’ve read somewhere, at least I think I have! (I’ve read so much over the last couple of years that I end up more confused than ever!) - that I could save the AVCs to fund my lump sum and then take a higher pension without taking a lump sum from the actual pension schemes - have I got that right? When I get my annual pension statements through they talk about lump sum amounts on there - does that mean I could forego those and instead get a higher pension than quoted on my statements?

I will have some savings to supplement my pensions each month until I get the state pension, and I’ll no longer have a mortgage, so really the lump sum would only be used to supplement my monthly income, so if I can have a higher pension then that would be better anyway!

Thank you so much for all of your help - I don’t comment often but I do read a lot of the great advice you give on here.

[RobertT]

Thank you so much for taking the time to reply to me Robert.

So I’ve already invested in the Lump Sum Booster, just not the AVCs.

I’ve read somewhere, at least I think I have! (I’ve read so much over the last couple of years that I end up more confused than ever!) - that I could save the AVCs to fund my lump sum and then take a higher pension without taking a lump sum from the actual pension schemes - have I got that right? When I get my annual pension statements through they talk about lump sum amounts on there - does that mean I could forego those and instead get a higher pension than quoted on my statements?

I think you mis-understood my previous reply?

You were in section C for your Age60/65 benefits....

If you had paid into the AVC's via the RMPP which were called Bonusplan and Flexiplan, you could use that money to fund the tax free cash when taking your Age60/65 pensions, instead of giving up some pension to fund it.
Those AVC's are specific to your Age60 and Age65 benefits, but can also be transferred out to a personal pension.

If you pay into the lump sum booster and the AVC's attached to the new RM Collective Pension Plan which started last October, you can use those to fund the tax free cash with your RMCPP pension.
That lump sum and AVC's are specific to your RMCPP benefits and can't be used to fund the tax free cash with your Age60/65 pensions, but can also be transferred out.

The Cash Balance(DBCBS) is specific to your RMPP benefits, which is your Age65(2012-2018) and a small portion of your Age60. That also provides a lump sum, which will probably be a mixture of tax free and taxable. There is no ability to convert that into more RM pension.

RM pensions can be quite confusing, but I hope that helps.

[pacey]

Thank you Robert - sorry to be so slow there - I think I’m finally beginning to understand it.

I suspect I’m still going to stick with what I’m doing - building up our savings. I accept I’m never going to be rich, and I realise it’s not the tax efficient way of saving for retirement - I think having in effect four different elements to my RM pension is enough for my brain to cope with, and as basic as I’m sure it sounds to most on here, there is a peace of mind for me that comes from knowing I have money in the bank that I can see growing, and that I can access when I want/need to.

Thank you again for taking the time to explain things to me.

[RobertT]

Normal savings accounts can be good because you have no major rules to abide by, whereas pensions can be a bit more complicated but if you're prepared to get your head around things, there's money to be gained.

It's obviously your choice, but have you considered a personal pension?

The tax breaks wouldn't be quite so generous as AVC's, but it would be separate from your RM pensions and so access isn't dependant on when you take those benefits. Although you will need to be at least 55, rising to 57 in 2028.
Plus if your income is below the personal tax allowance(currently £12,570), you can take out more than just the first 25% tax free.

For example:

You pay £10,000 into an ISA and you can take that out tax free anytime you want.

But if you pay the same into a personal pension, you get another £2,500 added in tax relief.
You can then take 25% tax free and even if you pay 20% tax on the remainder, overall you've still got £10,650 in your pocket.
And if your other income is below the personal tax allowance, any amount withdrawn up to that limit is also tax free, making it an even better deal.

[pacey]

Thank you so much for this Robert - my partner has very little in the way of a pension, so it sounds like this might be a good option for her, especially from a tax point of view.

Thank you so much, I’ll get looking in to that! Really appreciate all of your help

[Wullie10]

To be brutal you've done approximately the same years as me and the pension at 60 is not that great ( I had a AVC) . If You want to go in 7 years I recommend you save like crazy. Use the wife's allowance if possible with a private pension and ISAs etc. Going at 59 makes no sense , may as well wait till 60. Definitely the Bonus payment is a no Brainer. You'll have 7 years before state pension and unless you're due an inheritance or have a lot of savings I think you'd struggle on the Royal Mail pension alone . Obviously everyones circumstances is different.

[Hyrrokkin]

Thank you Robert - sorry to be so slow there - I think I’m finally beginning to understand it.

I suspect I’m still going to stick with what I’m doing - building up our savings. I accept I’m never going to be rich, and I realise it’s not the tax efficient way of saving for retirement - I think having in effect four different elements to my RM pension is enough for my brain to cope with, and as basic as I’m sure it sounds to most on here, there is a peace of mind for me that comes from knowing I have money in the bank that I can see growing, and that I can access when I want/need to.

Thank you again for taking the time to explain things to me.

Nothing wrong with having savings as a back up/alternative in fact correct way to do things on top of pensions.
But pensions are still king when it comes to tax etc etc.

[pacey]

To be brutal you've done approximately the same years as me and the pension at 60 is not that great ( I had a AVC) . If You want to go in 7 years I recommend you save like crazy. Use the wife's allowance if possible with a private pension and ISAs etc. Going at 59 makes no sense , may as well wait till 60. Definitely the Bonus payment is a no Brainer. You'll have 7 years before state pension and unless you're due an inheritance or have a lot of savings I think you'd struggle on the Royal Mail pension alone . Obviously everyones circumstances is different.

Thank you - that’s fair and honest. We do have some inheritance savings (premium bonds) but the rest will be up to us now. What you’ve said makes sense about saving hard and waiting until 60.

[pacey]

Nothing wrong with having savings as a back up/alternative in fact correct way to do things on top of pensions.
But pensions are still king when it comes to tax etc etc.
[/quote]

Thank you - I’m going to look in to a private pension for my wife I think, as it definitely makes sense

[RuralVan]

Robert, if the OP was a full time postie and decided to pay into an AVC to have enough of a pot built up in say 10yrs time (instead of the OP's 7yrs) in order to fund the tax free lump sum at retirement from the RMCPP, then roughly how much would the OP need to save per year.

You see I'm in a similar boat and don't want to tie all my money away, but saving in the new AVC to fund the tax free lump sum alone on retirement seems a no brainer, but I want to set a ceiling and not go over that limit. I know this is a lot to ask, but it might help a lot of people out.

[RobertT]

You're asking a virtually unanswerable question there, as there's a few variables to consider.

1. The first and most important one being how much the pension element is worth, because without that it's impossible to work out the maximum tax free cash.

With a defined benefit scheme such as final or average salary, a multiple of 20 is used. But that probably isn't the case with the RMCPP due to the the fact it doesn't automatically go up with inflation each year, and could go down in some years.

As far as I'm aware, there isn't a method mentioned in any of the literature, but when the CDC pension idea started it's long journey of planning and legislation back in 2018, a multiple of 16 was mentioned. Although the maths may actually be much more convoluted than just a simple multiplication?

2. You have the standard lump sum and the booster, which will likely form a decent percentage of the 25% tax free lump sum anyway, so the need to max out contributions into AVC's is reduced.

3. We don't know how the pension element will perform and how much it will go up or down over the years.
4. We don't know how the lump sum(inc booster) or AVC's will perform.


Here's an example of how to work things out using a multiple of 16:

Based on pensionable pay of £500 per week, you'll build up a basic pension of around £325 and a lump sum of £975 per year, add on the booster & that increases to about £1,500.
So after 10 years, you'll have £3,250 pension and £15,000 lump sum.

If a multiple of 16 is used then the pension element is worth £52,000(16x3,250), and assuming that is 75% of your pot, then the other 25% can be taken as tax free cash. Which means you'll need to have £17,333 in the lump sum(inc booster) plus AVC's.

In practice, your wages should increase over time and hopefully the value of your pension, lump sum and AVC's will too.

If you build up more lump sum and AVC's than 25%, any excess would be paid as a UFPLS(1st 25% also tax free).
There is also the option to transfer out AVC's as long as you're no longer an active member and you do that before you take the main benefits.

[RuralVan]

Thank you for taking your time to look and explain that Robert. Like I said, a rough estimate would suffice. Appreciate that.

[Kingy7185]

Just wanted to ask, if I have a pension pot of 9500 section C when I am 60.
Plan to use in the region of £1500 in for a lump sum payment. do you know how lump sum I could expect ?