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Savings verses Pension
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Red Man
Posted: 30 October 2010 14:40:32(UTC)
#1

Joined: 30/10/2010(UTC)
Posts: 1
I'm currently employed and I am in my companies Final Salaries/career average Pension scheme. I also contribute to the AVC scheme.

My question is would it better/prudent to put some of my savings approx £2000 into my AVC pension? Or put it into an ISA which would earn say 2.8%

The company guarantee the AVC will earn no less than 5% interest.

I'm hoping to retire at 56, i'm currently 50.

I know this may seem like a no brainer, but i don't know if there are any hidden tax laws etc.
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Dennis .
Posted: 30 October 2010 16:50:42(UTC)
#2

Joined: 26/12/2007(UTC)
Posts: 1,018
Lots of options here. Assuming that the £2K isn't your only cash pile I personally would put it in a stocks and shares ISA with a good equity income fund (see Hargreaves Lansdown wealth 150 selection) and let it grow for 6 years. You would then still have access to it rather than have to use it for an annuity (but don't forget about the tax free sum on retirement). (my advice is tempered by having had my AVCs in Equitable life which was also "guaranteed"!!!)
There are other considerations too depending upon the size of your final salary pension, if this plus your state pension goes over £22.4K then you will lose the older persons increased tax allowance at 65 so it might be best to withdraw enough on retirement to push your income below this level.

There is also some new legislation coming out soon about varying the amount you can withdraw from a pension depending upon having a minimum income so the picture could change again.
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chazza
Posted: 01 November 2010 09:06:04(UTC)
#3

Joined: 13/08/2010(UTC)
Posts: 606
I agree with Dennis. In your posiution, I would not put ANY money into an AVC, but would invest it in shares / fund ISA. With just £2,000, I would suggest putting £1,000 into Aberdeen Emerging Markets and £1,000 into Standard Life Smaller Companies. They won't produce much income, but should give you a decent capital gain which will be entirely tax-free whatever your circumstances once you retire. Buying an AVC at this time is likely, even with tax relief, to be an expensive way of very slightly increasing your (taxable) pension.
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Dennis .
Posted: 01 November 2010 09:50:26(UTC)
#4

Joined: 26/12/2007(UTC)
Posts: 1,018
Chazza, I agree with your recommendations and I hold both including a small holding (about £1.5K) in Standard Life Smaller companies which is also doing well however, I saw a note over the weekend about the performance of the investment trust (rather than unit trust) of the same name which has done even better (139% vs 92% over past year). So this might be worth a look too.
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chazza
Posted: 01 November 2010 10:20:11(UTC)
#5

Joined: 13/08/2010(UTC)
Posts: 606
Dennis,
the comparative figures refer to 5-year performance (not 1-year), but you are right: the IT has done significantly better than the similar UT, and even taking into account HL's dealing charges for shares within an ISA, the IT would be a better bet, certainly over a 5 to 6-year period. However, the IT is trading at a negligible discount at present so, though I hold some of each, I have topped up my holdings of the UT which, in the last month or so has actually done a tad better than the IT.
My advice was based on the assunmption that Red Man, as a novice investor with a small amount to invest, would find UTs less intimidating than an IT, despite my general preference for ITs over UTs.
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PensionsManager
Posted: 01 November 2010 14:01:19(UTC)
#6

Joined: 20/08/2009(UTC)
Posts: 18
Not enough info to advise, really, on such areas as what is important to you.

However, some company plans will allow you to take all AVCs as part of your tax free cash thereby keeping your normal scheme pension higher with less commutation being needed. Commutation is when you give up pension for tax free cash.

Often commutation factors are not that generous, so keeping that to a minimum can be a good idea.
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Sanity Clause
Posted: 01 November 2010 14:07:10(UTC)
#7

Joined: 02/08/2010(UTC)
Posts: 2
AVCs before ISAs.

With ISAs you will have paid income tax on your earned £2000.

With AVCs it'll be without tax being deducted. Then when you retire, you can take a lump sum in cash from your pension without paying tax.
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OOOooodeeeEEE
Posted: 02 November 2010 09:58:57(UTC)
#8

Joined: 07/07/2010(UTC)
Posts: 1
generally speaking;

If you are an HRT now and will be a BRT in retirement then AVC
If you are HRT now and HRT in retirement ISA or AVC
If you are BRT now and BRTin retirement then go ISA


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