Guaranteed NSP vs Risky AVC

T

Tom123

Guest
Getting past the question of mis-selling and the general lack of understanding of the issues allow me to summarise why there is no contest;

The NSP is a risk free guaranteed model. That means teachers nurses etc avoid (a) charges that absorb about 1/6th of all cash passing thru the pensions industry taken as 5% on contb and fund charge 1%. Cornmarket assume 6% pa asset growth before charges. (b) they avoid market risk - the facts are that equities have underperformed inflation for over ten years now. (c) they avoid pension rate risk - the cost of translating a fund into regular income has doubled and as interest rates head further south is set to quadruple.

The AVC model cannot outperform the inbuilt guaranteed return of NSP without staggering growth, no cyclical market downturn near retirement and no collapse in pension rates ( annuities). No different to endowment mortgages the cash pot argument for AVC's should not be used as it is by sellers to conceal the fact that for the risky route to be taken there must be a risk premium for the investor of at least 2% to 3% pa outperformance of NSP. Though possible this is improbable and has never happened.

The NSP links to a pension based on salary grade uplifts ie civil service, teacher and nurses salary inflation. This has been 66% higher than general inflation which is what normal annuity rates attract ie 5% pa vs 3% pa.

A young person going for NSP starting on a low grade and hitting high grades of pay near retirement gets a supercharged rate of return on the NSP.

The only USP on the AVC is that it can be encashed after clearing income tax on 75% of it. This is the only point. But most workers would be infinitely better off with the certainty of an escalating state guaranteed income for life 50% transferable to ones spouse. This is because a fund of a hundred grand might sound great but you factor in longer mortality, such a sinking fund could only be expected to pay out 4% tops per year. A guaranteed escalating joint life pension income is worth 30 to 40 times its value in capital terms.

Ask any financially trained self employed actuary or other independent financial professionals and they's bite off your arm for an NSP option.

Since 2006 you can transfer your AVC fund into the NSP to buy added years. This is what all tachers, nurses and civil servants should do except for those not risk adverse, extremely well off either way or expecting to need cash for a few short years before early death like before age 70. If you're normal, pretty risk adverse and you want certainty in your life especially at retirement there is no contest.

Finally by any measure the mass selling of AVC's in lieu of NSP is mis-selling. If it were reversed transfers out of the NSP into AVC's would be seen as a mis-selling scandel of huge proportions just as it was in the UK costing the industry £9 billion in fines and compensation. Bottom line you can't expect a salesperson who get about 20% of the first years AVC as commission to behave in any other way than to conceal the greater value of NSP which, when opted for means no cash for the salesperson. No salesperson can be expected to act with integrity under those circumstances and the standard presentation of information to workers is enormously skewed towards the AVC sale just as the normal "risky" Endowment mortgage presentation hugely underplayed the value of the guaranteed capital repayment mortgage.

PS The PrimeTime thread is populated by proxies for Cornmarket and other industry interests on the evidence of language and mindset so beware.I am an independent financial "Authorised Advisor" without conflicts in this sector.
 
hi tom`123

thanks for your very informative piece, i think it has come too late for me along with the primetime programme as i unfortunately took out an avc in february 2008,i would value your opinion on my best course of action now. for example is it possible to cash in my contributions to date. i realise that the execution fee is lost to me.
 
Well you're only on the wrong side for a few months. Your AVC account can be transferred to the NSP and your monthly inflow redirected. You should contact the Superann dept and investigate. If you can spare the monthly cash to buy extra years you should do so today.

If you're avc monthly commitment is too shallow at this point to get into the NSP you could continue to save in the AVC until it has sufficient volume to do it but this runs the risk that the loophole will be closed off by the dept of Finance. Anything is possible in the current climate.
 
hi tom123

thanks for your reply. re buying back years does that apply to me when i havent missed any years?teaching full time since age 20.im 31 now.

what about just stopping or suspaending my contributions to avc?what would happen then?
 
thanks for your reply. re buying back years does that apply to me when i havent missed any years?teaching full time since age 20.im 31 now.

what about just stopping or suspaending my contributions to avc?what would happen then?
How exactly did you manage to get fully qualified and in a full-time job by age 20?

On the evidence above, notional service could not be for you. Your normal retirement age is 60 and you'll have the full 40 years service by then.

Yours would be one case where AVCs are a sensible option:

1. 50% pension + 150% lump sum involves the commutation of 16.67% pension for the lump sum (versus the Revenue 66.67% maximum pension). Revenue accept that 16.67% is too high.

2. Public service pensions pay a surviving spouse only 50% of the original pension. Revenue allow 100%. [This is a very expensive feature to fund - a search of annuity rates will give some idea of how costly it is.]

3. Allowances and promotions gained in the last 3 years of service will not be fully pensionable.

4. The employee may have other non-pensionable income.

5. Revenue in fact permit 66.67% PLUS the OACP. The OACP is integrated into the pensions of post-1994 hired public servants and is not payable to those hired before that date. All can fund the value of the OACP themselves. [This applies also to private sector workers where integration of the OACP is a feature of many defined benefit schemes.]

So you can see that you do have substantial scope (within % of income contribution limits) for AVCs. But make sure you're not being fleeced on fees by your provider.
 
If you're avc monthly commitment is too shallow at this point to get into the NSP you could continue to save in the AVC until it has sufficient volume to do it but this runs the risk that the loophole will be closed off by the dept of Finance. Anything is possible in the current climate.
The DES closing the notional service scheme (to new entrants at least) would seem to be a strong possibility now. It would be hugely politically popular due to the turn in the tide of opinion among the chattering classes against public servants and, particularly, their pensions.

What might save NSP for the moment is that the contributions are a stream of revenue to the government vs a long-term payout cost. Revenue looks to be king in government financial thinking today.
 
Tom, actuarially the NSP is better value, no question. But you ignore one big risk - longevity risk. Statistically risk is often measured as the variance in potential overall return. An NSP would probably have more variance due to the complete uncertainty of how long one is going to live. It is misleading to say that the NSP is guaranteed and with no risk.

Also note how most people in the private sector take the tax free lump sum as a no brainer. But in fact the commutation factors are usually bad value and even after allowing for tax they would be better off actuarially foregoing the lump sum and taking enhanced pension. But there is more to this decision than actuarial math. In most people's perception a lump sum is far more preferable qualitatively than an annuity.
 
hi oysterman,

thank you for your reply.

to answer your query....i qualified at 20,got two years temporary permanent jobs,and then a fully permanent job,so all the years were counted for increments and pension contributions. cornmarket are going to ring me later today because i expressed dissatisfaction following the primetime programme.
what do i say!
 
Back
Top