Local authority scheme members flock to beat AVC tax deadline

Prior to the changes, members of the Local Government Pension Scheme have been able to contribute 50 per cent of their pay towards an AVC arrangement, but were able to take the entire AVC pot as tax-free cash on retirement.

Members will soon be able to contribute 100 per cent of pay towards this structure, but may only be able to take 25 per cent tax-free. Provider Prudential has substantially boosted its resources to meet this demand.

The Treasury is expected to deliver a policy intention shortly on whether the tax-free lump sum should be limited to a quarter of a member’s AVC pot.

“As demand has increased over the past few weeks, Prudential [has] enhanced [its] local government website to provide an alternative route for members thinking about joining,” said a message to members of Shropshire County Pension Fund on the scheme’s website.

“Prudential [has] also significantly increased [its] resources to process the high volumes of applications.”

The West Midlands Pension Fund used a staggered communications strategy to inform its members of the changes:

• Pensioner members will receive an LGPS 2014 disclosure letter with the April pensioner newsletter;

• Deferred members will receive the letter as part of their deferred benefit statements in May;

• Active members will receive a specific newsletter in June, to ensure disclosure time limits are met.

“As soon as the regulation and transitional regulations had been agreed, events were organised for members across the region covering the changes to the scheme and the protections that will be in place,” said Antony Ellis, communications officer at WMPF.

The scheme invited Prudential to the events to explain the changes to members. It also sent an announcement to its employer database providing information on the move.

Despite the boom in demand among some public sector schemes, AVCs in general are decreasing in popularity, according to benefits experts.

“AVCs generally are not that popular these days,” said Jamie Jenkins, head of workplace strategy at insurer Standard Life.

“They were born as a way to pay money over and above your defined benefit scheme, so as they’ve been closing DB schemes they’ve become less and less relevant.”

The most common types of AVC are money purchase and added years. The latter essentially allow members of DB schemes to buy the benefits associated with extra years of service.

Money purchase allows members to add to their pension pot, before using it to buy an annuity, take it as a lump sum or receive extra benefit calculated by the scheme at retirement.

The DB nature of added years AVCs has led to a decline in popularity, according to Faith Dickson, partner at law firm Sackers.

“Schemes see them as adding to their benefit liabilities,” she said. “The liabilities can be better managed by schemes [with] money purchase.”