It may be possible for you to boost the
retirement benefits payable from your occupational pension
scheme.
Money Purchase AVCs
One of the ways you can do this is by paying into an Additional
Voluntary Contribution (AVC) arrangement run by your scheme
trustees. The majority of these are money purchase, which
means that your contributions are invested, usually with an
insurance company, to build up a fund.
An AVC arrangement run through your employer's pension scheme is
known as an 'in-house' AVC scheme. The employer normally bears the
cost of administration of this scheme and so costs tend to be lower
than topping up pensions through other means.
Added Years
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.
Free Standing AVCs (FSAVCs)
It may be possible for you to pay into a FSAVC
arrangement. This is similar to a money purchase AVC but is
provided by external providers.
Since 6 April 2006, it has no longer been compulsory for
occupational pension scheme trustees to offer an AVC facility to
its members.
Q & A's
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 £245,000, whichever is
lower.
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.
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.
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.
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.
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.
