Pension AVCs or ISA

Hi everyone. I am looking at ways of investing my spare monthly cash. Currently I invest in stocks & shares ISAs and also some to cash savings.

I pay into my workplace pension (Public sector employer) and my employer pays in the maximum too.

I’ve been thinking about investing in AVCs too but I wasnt sure whether to just put it into an ISA. The bonus of AVCs is that I get tax relief when I invest so the pot grows faster. However I can only withdraw 25% tax free when I come to withdraw and I would probably want to take all my AVCs as a lump sum when I retire so would be taxed on the other 75%.
With an ISA I can withdraw the whole lot tax free.

I wondered if anyone else had invested in AVCs or had any thoughts on which might be the best option. I’m not looking for nailed on financial advice so I don’t need a disclaimer before you answer :joy::joy::joy:.

Just looking for some thoughts.

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The real advantage with pensions over ISAs is if your a 40% tax payer now & 20% in retirement.

Most AVCs allow a limited number of investment choices with some being a little expensive. With an investment ISA most provider have over 2000 different choices.

20% tax payer now = ISA


Which pension scheme are you in? What benefits do those offer.

It depends on what the AVC for your employer’s pension scheme offers, for example in HigherEd employees on the lower pay scales get SAUL - the AVCs benefits are a Defined Benefit - not much of these around so definitely worth taking that over an ISA.

For those on higher grades, there is USS
In this case, the AVC is Defined Contribution with an employer match up to an additional 1% of salary, after nothing.
In that case, the AVC is much less beneficial but the 1% match is worth taking. (You contribute 1% of your salary and they match it - so doubling how much goes in to your pot)

Beyond that, a SIPP or ISA may be equally good and give you more control over where money is invested. Some employers pay for the fees to run the investment fund though if go for the AVC option - worth taking into account.

SIPP particularly relevant if in the 40% bracket and/or ISA is full. Same withdrawal rules apply as other pension schemes.

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Thanks. It is a Civil Service AVC scheme through Legal and General. The employer won’t add anything to it because they max out into the main scheme. The only real benefit I can see is a low overall charge. The AVC benefits arent linked to my main pension in terms of benefits from that.

I’m not in the 40% bracket yet so haven’t really got that till think about. I’m thinking split some into the pension and the rest into my ISA.

The LISA coyote have been an option but I don’t like that I can’t pay in after 50.

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This is spot on. Look at your input vs output tax. Defined contribution pensions really make sense if you are a 40% (or more) tax payer whilst contributing and a 20% or less while drawing. There is a slight benefit to 20% tax payers because of the 25% tax free lump sum, but against that are the restrictions on the withdrawal until you are old enough.

With ISA you pay the tax on the way in - nothing on drawing - this benefits 20% tax payers more than higher rate tax payers.

For defined benefit pensions, fill your boots! It is extremely unlikely that any other savings will compete, apart from the ability to leave a defined contribution pension pot to your estate whilst you tend to lose a defined benefit pension when you die.

For me the rules for defined contribution are:

  1. Always put enough into the pension to get the maximum employer match - you are getting an immediate return on your money
  2. If >=40% tax put anything you can afford into the pension either up to the 40k (or reduced) limit or until your predicted pension is likely to take you over the higher tax limit on drawing, then max ISAs.
  3. If <40% tax, max ISAs then load pension