Defined contribution: AVCs and FSAVCs
Additional voluntary contribution (AVC) and free-standing additional voluntary contribution (FSAVC) schemes allow members of workplace pension schemes to pay extra contributions to build up additional benefits.
How AVC and FSAVC schemes work
AVC and FSAVC schemes were introduced to allow members of workplace pension schemes to build up additional pension benefits.
AVC schemes may be offered by employers and the Board of Trustees of the employer’s pension scheme. They are also known as ‘in-house AVC’ schemes and the employer covers the set-up costs of the AVC.
There are two main versions of AVC schemes:
A defined contribution AVC scheme allows you to pay additional contributions into the scheme. These contributions are invested, allowing you to commence drawing additional pension benefits from the age of 55. The value of these benefits will depend on how much has been paid into the AVC, the length of time that each contribution has been invested and investment growth over this period.
A defined benefit AVC (or added years AVC) allows you to buy additional months or years of membership in the employer’s defined benefit pension scheme.
These added years then increase the pension benefits that you can receive at retirement through increasing the proportion of final pensionable earnings or career average revalued earnings.
As an added years AVC is tied to the main employer’s scheme, benefits can only be taken from the AVC at the same time that benefits are taken from the main scheme.
Following the pension reforms in 2006, AVCs and FSAVCs became less popular once it became possible to hold other types of pension, such as personal pensions and stakeholder pensions, as well as being a member of the employer’s workplace pension scheme.
Added years AVCs can still offer valuable benefits, but the cost of purchasing each added year must be compared to other options.
How to take your benefits
You can commence drawing benefits from the FSAVC from the age of 55, regardless of whether or not benefits are being taken from the employer’s pension scheme.
The value of the benefits from the FSAVC will depend on:
- how much has been paid into the scheme;
- the length of time that each contribution has been invested;
- investment growth over this period; and
- the level of charges.
Generally, you can decide whether to receive an income only from the scheme, or a tax-free cash lump sum and a (reduced) income. The amount of tax-free cash lump sum that you can elect to take is usually up to a maximum of 25% of the value of the FSAVC at retirement. The balance of the FSAVC’s value is then used to provide income through purchasing an annuity or income drawdown.
How you take benefits from an in-house AVC scheme is more complicated. For example, it may be suggested that you take the AVC fund as a cash sum up to the maximum permitted amount based on your total pension benefit. It’s really important that you understand the scheme rules to see the best way of taking your benefits. We can help you understand the questions you need to ask.
As with all pension income, you are liable to income tax, but are not liable to National Insurance contributions.
If you have previously contributed to an AVC scheme, you may have retained benefits under the scheme. You may want to consider transferring the value of any old pensions to a new pension scheme. Please talk to us if you are interested in this.
How can I find out what benefits my AVC or FSAVC scheme offers?
You would normally have been given a booklet when you joined the scheme. This booklet would give you details of the benefits. If you no longer have the booklet, contact the Scheme Administrator, pension provider or insurance company and ask for details.
I have lost the contact details for the Scheme Administrator, what can I do?
If you have lost track of your pension details, the Pensions Tracing Service can help you to find the current contact details. This is a free service and more details are available here.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.