Additional Voluntary Contributions (AVCs) are used to save money into an investment vehicle of your choice in order to build up an additional “pension pot” rather than a defined amount of extra pension. This “pot” is not saved with or invested by SYPA or the South Yorkshire Pension Fund or any employee or officer of the Fund. Instead it is paid directly to one of two AVC provider companies who invest the money on your behalf in an investment route of your choice. The contributions are deducted directly from your pay by your employer and paid directly to the provider you have chosen.
The amount you wish to pay in, the length of time you want to save, the potential investment return received on your savings and the age at which you wish to retire are all factors that you should carefully consider when determining whether or not taking out an AVC is appropriate for you.
The two Companies that SYPA use to provide AVC schemes for members are:
• The Prudential Assurance Company Ltd – www.pru.co.uk/localgovavc
• The Scottish Widows Life Assurance Company Ltd - www.scottishwidows.co.uk/southyorkshire
Each company also has a dedicated helpline if you wish to telephone them. These are:
• Prudential helpline Tel: 0800 434 6629;
• Scottish Widows helpline Tel: 03457 556557.
Clicking on the hyperlinks will take you to the providers’ specific Local Government AVC sites where you can get more information about each company and more information about Local Government AVCs in general. You can also download information packs and application forms if you decide that this type of savings scheme is right for you. The fact that SYPF offers access to two firms of providers should not be seen as an endorsement by the Fund of any product offered by them or that an AVC is an appropriate investment for an individual. To assist you in assessing whether it is and whether this type of saving will achieve what you want to achieve financially at retirement SYPA has arranged to provide members with free access to a panel of independent financial advisors.
You can pay up to 100% of your pensionable pay into an AVC plan. You will have a number of choices as to how your contributions are invested, these choices will be detailed in the provider’s information packs. Contributions will be deducted from your pay and if you are a tax-payer you will be eligible for tax-relief at source meaning that, as a basic rate tax payer for example, every £100 saved will only cost you £80. There are a number of options available for members at retirement as to how the accumulated fund is used. These options can be quite complex but details and explanations are given below.
The LGPS is unique amongst Public Sector Schemes in that, subject to HMRC limits, you may be able to take the whole of your AVC Fund at retirement as tax-free cash. Others will be able to take a proportion of it as cash. Each individual has a limit, set by HMRC and based upon a specific formula, on the amount of retirement benefit that can be taken as tax-free cash. The formula for the calculation is different for people with an AVC Fund to those without. This means that the tax free cash limit can be calculated for a member who does not pay AVCs on one basis but, if the member commences paying AVCs then, the next time that limit is calculated it will be on a different basis. In addition, the tax free cash limit quoted at any given point in time for a member will not simply increase by the amount of AVCs saved in the period between calculations. Many factors affect the individual limit on tax free cash including pay and overall value of the benefit package.
Because of the complex nature of AVC funds in relation to tax-free cash, the calculation of HMRC limits and the amount of pension that might be required to be sacrificed in return for extra tax-free cash, SYPA will only provide detailed estimate information on tax-free cash and pension benefits if you are within 12 months of your proposed or intended retirement date when the estimate is provided. At all other times estimates provided will be based on standard LGPS benefits and will not include calculations allowing for AVC funds.
Purchase of scheme membership (AVC to Service Credit)
Members who commenced paying AVC contributions before 13th November 2001 have the option of using their AVC Fund to purchase additional membership in the main scheme thus enhancing their LGPS benefits. People who are able and opt to do this must attain the age of 55 and cease paying contributions to their AVC Fund. The Fund is treated like a transfer value and a calculation is performed to assess how much service credit can be awarded in return for the AVC Fund being paid into the Main Fund.
Members who commenced AVC contributions on or after 13th November 2001 or who commence in the future do not have this option available to them.
This option allows members to purchase an income from the LGPS. The AVC Fund is paid into the Main Scheme Fund which then pays the member an income based, amongst other things, on age and gender factors.
AVC Provider Annuity
This option allows members to use their AVC Fund to purchase an income direct from the Company with whom they invested their AVC contributions. Again, the Company will provide an income based on age and gender factors as well as whether survivor benefits are required and whether the income should escalate in retirement to protect it from inflation.
In some circumstances members will have the option of choosing a combination of the options available, for instance, a member may use some of the AVC Fund towards Tax-Free cash and some to purchase an income in one of the ways described.
Because of the number of options available and the complexity of the combinations involved more detailed information on this aspect of AVCs at retirement will only be provided on request at or near the member’s retirement age.