Additional Voluntary Contributions (AVCs)

What they are, how they work, what are the options?

Background information:

• All LGPS employers have an AVC arrangement in place, either with an Insurance Company or a Building Society.
• Southwark’s existing AVC provider is AEGON (part of Scottish Equitable plc), who like other providers offer various investment fund choices to match a members risk profile.
• Equitable Life was Southwark’s former AVC provider. They encountered financial difficulties circa 1995 and stopped being able to take new business (except for life insurance).
• Southwark members were offered the opportunity to transfer their benefits to Aegon at that time, but the nature of Equitable Life’s financial difficulties meant that members with certain policies (GARs) would have suffered significant penalties if they transferred their AVCs prior to retirement age.
• Equitable Life’s finances have now recovered sufficiently that their assets and liabilities were transferred to Utmost in January 2020.
• There are currently no active members making AVCs to Utmost.

What are AVC’s?

• AVCs allow members of a workplace pension to build up additional pension benefits (a “pensions pot") at retirement.
• AVCs are ‘portable’ with a number of different options available to members at retirement.
• They are a tax efficient investment and way of boosting retirement income/savings.
• Contributions are deducted directly from pay before tax is deducted. If you pay tax you receive tax relief automatically at source.
• You have your own AVC account and decide how funds are invested. AVC fund values are not guaranteed, so investments can increase as well as decrease depending on Stock Market fluctuations.
• AVCs are a great option for those who joined the LGPS later in life, or for those who could not contribute more when they were younger.

How they work?

• If a member takes out an AVC with Aegon, their monthly contribution is deducted direct from their salary and they receive tax relief at their rate of income tax payable (20% basic rate or 40% higher rate).
• Currently, a member may pay up to 100% of his/her taxable earnings into an AVC.
• AVCs are very flexible and can be started/stopped at any time. Members can make regular monthly AVCs or one-off AVCs.
• Under existing HM Revenue & Customs rules there are restrictions on the level of pension savings you can have each tax year before you become subject to a tax charge. This is called the Annual Allowance
• Most members are unaffected by these restrictions, but if a member is interested in paying AVCs they should be aware of the annual limits each tax year. To find out more please see the Annual Allowance factsheet.
• Growth in the value of the AVC fund is free from capital gains tax.

What are they AVC options upon retirement?

1. Take up to 100% of your AVC fund as tax free cash

• If you take your AVC at the same time you take your main LGPS benefits, you can take up to 100% of your AVC fund as tax free cash (as long as your total lump sums from the LGPS do not exceed 25% of the combined value of your benefits (including your AVC fund), or 25% of the Lifetime Allowance (LTA), £268,275 for the year 2021/22, or 25% of your remaining LTA (if you have previously taken payment of any pension benefits).
• Please see the LTA factsheet for more information.

2. Buy one or more annuities (i.e. a regular income that is guaranteed for life)

• Using the proceeds of an AVC fund, members have the option to buy one or more annuities with an insurance company, bank or a building society of their choice. The chosen provider(s) will take the value of your AVC fund and pay you an annuity (a pension) in return. The amount of annuity you are paid depends on several factors such as AVC fund value, your age, mortality rates, death benefit provision and interest rates.
• Example case 1 (annuity with attaching 50% dependant/spouse annuity)
• AVC fund: £75,000
• Annuity Rate: £20 cash per £1 pa pension
• Annuity = £3,750 pa (£75,000 / 20)
• Annuities offer different features which may be of interest to some members, such as a guaranteed minimum payment period (usually 5 years), improved terms if you are in poor health and annual increases to keep up with the cost of living. When you buy an annuity, you can usually take some of your AVC plan as a tax-free lump sum (25%) at the same time and use some or all of the balance to buy the annuity.
• Example Case - (poor health, ‘enhanced’ annuity)
• AVC fund: £100,000
• Tax free cash: £25,000 (25% of AVC fund)
• Enhanced Annuity Rate: £18 cash per £1 pa pension
• Annuity = £4,167 pa (£75,000 / 18)

3. Buy a top up of additional LGPS pension

• If you were an active member of the scheme on or after 1 April 2014, you can buy a top-up of LGPS pension with your AVC fund. Dependents benefits will be automatically provided in the event of death. The top-up pension also increases in line with inflation like the main LGPS pension.
• If you left the LGPS before 1 April 2014, you can only buy a top-up pension with your AVC fund if you take immediate payment of your main LGPS benefits when you retire and take your AVCs at the same time, i.e. you are not allowed to buy a top-up LGPS pension with your AVCs if you defer your main LGPS pension benefits when you leave a LGPS employer and take them at a later date.
• You have the option to provide for dependents' benefits in the event of your death. The top-up pension you buy will increase in line with inflation like the main LGPS pension.

4. Buy extra membership in the LGPS

• You can buy extra membership (i.e. pensionable service) in the LGPS but only if your election to pay AVCs was made before 13 November 2001.

Example:

Gender: Female

Age @ last birthday: 61 Years

Pensionable Pay: £30,000 Per Annum

Accumulated AVC Fund: £50,000

Factor x 18.15

Factor y 2.03

A=1/60 x £30,000 x [(18.15) +(60/160 x 2.03)] = £9,455.63

£50,000/£9,455.63 = 5.2879 years = 5 years 105 days

5. Defer taking your AVC fund up to age 75

• If you left the LGPS before 1 April 2014, you do not have to take your AVCs at the same time as you take your main LGPS benefits.
• You can leave your AVC fund invested up to your 75^th birthday.
• However, if you defer taking your AVCs you will be unable to buy a top up LGPS pension or membership (if applicable) in the LGPS, or take 100% of your AVC fund as tax-free cash.

If you were a member of the LGPS on or after 1 April 2014 you must take your AVCs at the same time as you access your main LGPS benefits (unless you flexibly retired in which case see later slide).

5.Transfer your AVC fund

Members can transfer out their AVC funds independently of the main LGPS benefits even if they are still paying into the main LGPS scheme. However, there are certain conditions that must be met:

• You must have stopped paying in AVCs in any LGPS employment held.
• You must not be in receipt of regular income either from an annuity or a top-up LGPS pension in the LGPS (in respect of a LGPS AVC plan) that you paid into and took payment of previously.
• if you hold more than one LGPS AVC fund you must transfer out all AVCs even if they are held with different LGPS employers (other than an AVC fund awarded as part of a divorce settlement).
• If you transfer your AVC plan to one or more different pension arrangements you may be able to access AVC options that are not available under the LGPS regulations.

You can take a combination of the options above if they apply to you …..

Deciding what to do with an AVC Fund:

• Deciding how to use an AVC fund is one of the most important financial decisions a member is likely to make, so independent financial advice should be considered to help with any decisions. Pension Wise is a free, impartial service offered by the Government to provide guidance when someone reaches age 50, to help understand all the AVC options. More information is here - https://www.pensionwise.gov.uk/en or by calling 0800 138 3944 to book an appointment.
• Help finding an independent financial advisor is available from the Money Advice Service by visiting -https://www.moneyadviceservice.org.uk/en/articles/choosing-a-financial-adviser

AVC’s and Flexible Retirement-

• If a member elected to start paying AVCs before 13 November 2001 the AVC fund will cease when they flexibly retire, and they will have to use all of the AVC proceeds in one of the covered options at the same time they draw on their flexible retirement benefits.
• If a member elected to start paying AVCs after 13 November 2001 they can choose to take all or none of the AVC proceeds in one of the covered options, and/or continue to pay AVCs.

AVC Collection Process (COP45)

• Regular AVCs are collected from members pay each month.
• Pension Services Data Team run a monthly report from SAP (Southwark’s Payroll System) to pick up AVCs that need to be paid to Aegon.
• The report is then checked, reconciled and processed by the Pension Services Administration Team and AVCs are paid across to Aegon using the Smartpay online system.

Aegon credit incoming AVC payments to member accounts, to be invested in accordance with the relevant investment

Disinvestment Service-

• When a member claims their AVCs there is a process that has to be followed before the benefit can be paid.
• AVCs will cease one month before a member retires.
• Disinvestment instructions are given to Aegon.
• Units are then surrendered at close of business on the day disinvestment instructions are given (or the following business day if instructions were given after 5pm).
• Units are then cashed out leaving a final AVC fund value which is then paid across to the Administering Authority.

Investment Choices with AEGON

The Southwark Fund has an AVC arrangement with Aegon which consists of an approved range of active and passively managed unit linked funds. Aegon’s investment options range from simple solutions that automatically adapt through the lifetime of each member to a more bespoke investment choice. Aegon currently offers 11 funds that are available to new contributors. The default fund for the arrangement is the BlackRock Aquila Concensus Fund.

• The default fund
• Managed Fund
• Bonds and Gilts
• Cash
• Equities
• Property
• Passive v Active
• Fund choice
• NOTE - AVC investment risk falls solely on an employee/member (not employer). Fund values can go up or down as they are linked to Stock Market performance.

If you are interested in paying AVCs you should lbspensions@southwark.gov.uk or call 020 7525 4924