If you are paying Additional Voluntary Contributions (AVCs) arranged through the LGPS (in-house AVCs) and elected to take the contract out before 1 April 2014
You can pay up to 100% of your pensionable pay into an in-house AVC. Your employer can also pay towards your AVC at their discretion – this is known as a shared cost AVC.
Your contributions will cease when you retire (or cease two days before age 75 if you carry on in work beyond that age).
If you draw benefits on flexible retirement and your AVC contract started on or after 13 November 2001, you can choose to take all of your AVC fund at the time you draw your flexible retirement benefits, and, if you wish, continue paying AVCs. If your AVC contract started before 13 November 2001 your AVC contract will cease and you will have to use all of your AVC fund in one of the ways below at the time you draw your flexible retirement benefits.
Here are the different ways you may be able to use your in-house AVC fund:
Buy an Annuity
This is where an insurance company, bank or building society of your choice takes your AVC Fund and pays you a pension in return. You can do this at the same time as you draw your LGPS benefits or you may be able to choose to delay payment until any time up to the eve of your 75th birthday.
An annuity is paid completely separately from your LGPS benefits. The amount of annuity depends on several factors, such as interest rates and your age. You also have some choice over the type of annuity, for example whether you want a flat-rate pension or one that increases each year, and whether you also want to provide for dependants’ benefits in the event of your death.
Annuities are subject to annuity rates which in turn are affected by interest rates.
When interest rates rise, the organisation selling annuities is able to obtain a greater income from each pound in your AVC fund, and therefore can provide a higher pension. A fall in interest rates reduces the pension which can be purchased.
Buy a Top-up LGPS Pension
You may be able to use some or all of your AVC fund to buy a top-up pension from the LGPS. This automatically provides inflation proofed pension and dependants’ benefits and is based on set purchase factors which do not tend to change.
Buy extra membership in the LGPS
If your election to start paying AVCs was made before 13 November 2001 you may be able in certain circumstances (such as flexible retirement, retirement on ill-heath grounds, or on ceasing payment of your AVCs before retirement) to convert your AVC fund into extra LGPS membership in order to increase your LGPS benefits.
Take your AVCs as cash
You may be able to can take some or all of your AVC fund as a tax-free lump sum. However, you can only take it all as a lump sum if you draw it at the same time as your main LGPS benefits and provided, when added to your LGPS lump sum, it does not exceed 25% of the overall value of your LGPS benefits (including your AVC fund).
Transfer your AVC fund to another pension scheme or arrangement
You can transfer your AVC fund to another pension scheme or arrangement, including to a scheme that offers flexible benefits, independently of your main scheme benefits; and provided you have stopped paying AVCs, you can even transfer your AVC fund even if you continue to contribute to the LGPS.
If you were to transfer your AVC funds to a defined contribution scheme which provides flexible benefits, the four main flexible benefit options that scheme might offer (from age 55) include:
to purchase an annuity (yearly pension) or scheme pension
taking a number of cash sums at different stages
taking the entire pot as cash in one go
flexi access drawdown
You should be aware that there may be tax implications associated with accessing flexible benefits. The income from a pension is taxable; the rate of tax you would pay depends on the amount of income that you receive from a pension and from other sources.
If you are considering taking flexible benefits you should consider taking independent advice to help you decide which option is most suitable for you.
Details of these options will be given to you shortly before your retirement.
If you draw benefits on flexible retirement and your AVC contract started on or after 13 November 2001 you can choose to take all of your AVC fund at the time you draw your flexible retirement benefits, and, if you wish, continue paying AVCs.
If your AVC contract started before 13 November 2001 your AVC contract will cease and you will have to use all of your AVC fund in one of the above ways at the time you draw your flexible retirement benefits.
If you leave before retirement, your contributions will cease when you leave. The value of your AVC fund will continue to be invested until it is paid out. Your AVC plan is similar to your main LGPS benefits: it can be transferred to another pension arrangement or drawn at the same time as your LGPS benefits.
Payments into in-house AVCs will stop when you leave or retire.