TPAS - The Pensions Advisory Service

Additional Voluntary Contributions (AVC)

One of the ways in which you can 'top-up' your occupational pension scheme is by paying into an Additional Voluntary Contribution (AVC) scheme run by your employer.

The majority of AVC schemes are money purchase schemes, which means that your AVCs are invested, usually with an insurance company, to build up a fund. Pension schemes, however, are not obliged to offer an AVC scheme.

An AVC scheme run through your employer's pension scheme is known as an 'in-house' AVC scheme. The employer bears the cost of administration of this scheme and so costs tend to be lower for members than topping up pensions through other means.

Do not confuse an in-house AVC scheme with:

• when a member can contribute AVCs to an external arrangement - this is known as a Free-Standing AVC Scheme (FSAVC), or
• choosing to pay additional contributions to buy 'Added Years'; in a salary-related scheme.

If your scheme allows you to buy added years, this will enable you to increase the number of years of service you have in your main scheme. The extra service will boost both the amount of pension that you will receive and your tax-free cash allowance, irrespective of when you started contributing.

How much you pay as voluntary contributions will be worked out by your main scheme. The cost will depend on how many years you want to buy and certain factors like your age and salary for pension purposes. The amount you can pay is limited by the Revenue's rules on contributions.

Q & As

How much can I pay?

The total amount you can pay into all your pension arrangements each year, including any AVC scheme, is limited to either of 100% your earnings or £235,000, whichever is lower.

What are the benefits?

The pension scheme may allow members to take a tax-free lump sum from their AVC fund.  You should check with your pension scheme administrators.

'In-house' AVC schemes frequently benefit from no cost or low cost administration charges as the trustees can negotiate these with the provider of the AVC arrangement. Contributions payable to AVCs enjoy the same tax concessions as the main scheme contributions.

What are the risks?

Many people choose to contribute to an AVC scheme because it gives them an opportunity to make good any shortfall in future pension benefits brought about by breaks in service, early retirement etc. However, because AVCs are an investment, there is no guarantee that your contributions will exactly make up for any years of membership you will fall short of building up.

What are the advantages of paying into a FSAVC?

With an FSAVC, you have the choice of the insurance company, the choice of investment medium, and the opportunity to carry on contributing even if there is a change of the main scheme or change of employer.

What are the disadvantages?

Like an 'in-house' AVC scheme, contributions to an FSAVC scheme can only be made while you are a member of an occupational pension scheme. If you leave an occupational pension scheme and do not join a new one, FSAVC payments must stop.

FSAVCs inevitably, in most cases, are expensive to set up compared with an 'in house'; AVC arrangement. This is because the employer sponsors the 'in house' arrangement whereas the FSAVC is not sponsored. In addition, the contributor may also see that the annual charges are higher than an 'in house' AVC arrangement.

When can the benefits from additional contributions come into payment?

This will depend on the rules of your employer's pension scheme. Since 30th June 1999, HM Revenue & Customs has permitted AVCs and FSAVCs to come into payment at a different time from the main scheme benefits. Benefits from both these types of arrangements can now be taken before retirement date, at retirement date, or after retirement date, or at any age between 55 and 75 regardless of whether the contributor has left employment and is or is not taking the proceeds of the main scheme benefits.

However, this will only be available if the pension scheme rules have been altered to facilitate this - it is not an automatic right. You should also note that benefits could be taken before age 50 if the contributor leaves employment because of incapacity.

Do I have any other options to top up my pension

Yes. It is possible to contribute to an occupational pension scheme and a stakeholder or personal pension at the same time. As long as you do not pay in more than 100% of your earnings up to £235,000, in any tax year you will get tax relief on all your contributions.