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Making Additional Voluntary Contributions (AVCs) to your company pension

 AVCs offer a cost-effective way to increase your pension pot if you have a workplace pension. There are now more ways to pay extra into your pension.

Topping up your pension with AVCs

Payments into your workplace pension are normally made up of:

  • your own contributions
  • contributions from your employer
  • contributions from the government, in the form of tax relief

You might want to increase the value of your pension pot to provide additional benefits for yourself or your family. Or because you started saving in a pension later in life.

One option is to make 'top up' payments from your salary, so you'll receive more income when you retire. These payments are known as AVCs and were offered by all workplace pension schemes up until April 2006.

Advantages of AVCs

You benefit from:

  • lower administration charges in most cases than if you invested into a separate pension scheme
  • the opportunity to stop or vary the amount you pay
  • tax relief on your contributions (up to certain limits – read 'Pension rules from April 2006')

Some workplaces may no longer offer AVCs following changes to pension rules in April 2006. There are now more options for topping up your company pension through other means.

How AVCs are used by your pension provider

The benefits you'll receive from your AVCs will depend on the type of workplace pension scheme you're in, and the rules of the scheme.

Defined benefit pension schemes (all personal pension schemes, including stakeholder pension schemes)

With a defined contribution pension scheme, your pension pot is based on the amount of money paid in and how well the investments have performed. At retirement, the whole pension pot, including your AVCs, is used to provide your pension income.

Defined benefit pension schemes (final salary schemes)

With a defined benefit pension scheme, the amount you get is based on your salary and the number of years you've been in the scheme. Sometimes AVCs increase the number of years your benefits are based on; sometimes they build up a separate fund to buy extra benefits.

You'll need to talk to whoever runs your pension scheme to find out about your schemes rules.

AVC refunds

If you die, your AVCs are usually repaid - together with any interest earned. However, this depends on the rules of your scheme, so you'll need to check with whoever runs your pension scheme.

Free-standing AVCs

Free-standing AVCs (FSAVCs) differ from ordinary AVCs because they're:

  • arranged by you, not through an employer
  • paid into a pension scheme run by a financial institution such as an insurance company or bank

The advantages of FSAVCs are:

  • you can continue to pay into a pension scheme even if you change employer
  • they may give you more investment options

However, the administration costs will usually be higher.

Pension rules from April 2006

Up until April 2006, there were restrictions on how much you could put into a workplace and personal pension at the same time. This meant that AVCs sometimes offered the only option for topping up your pension.

However, following the April 2006 changes, you can now save as much as you like into any number of pensions schemes. This includes workplace, personal and stakeholder pensions, including through AVCs and FSAVCs.

You'll get tax relief on your contributions of up to 100 per cent of your earnings each year, subject to an upper 'annual allowance'. Savings above the annual allowance and a separate 'lifetime allowance' of total pensions savings will be subject to tax charges.

Where to get help and advice

A number of organisations offer free information on the different ways you can save for your pension but they can't give you financial advice tailored to your needs. To understand the best options for you it's a good idea to get financial advice.

More useful links

Do it online

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