What are AVC and FSAVC schemes?

• how much you’ve contributed to the AVC scheme
• how long each contribution has been invested
• how your investments perform over time.

Some employers will add to (or possibly match) your contributions to your DC AVC scheme.

FSAVCs are similar to additional voluntary contributions and are also designed to sit alongside your company pension.

The difference is that instead of the employer setting up the plan and deducting contributions from your salary, you set it up yourself through a pension provider and the FSAVCs are collected from you directly.

Your contributions are then invested to give you a pot of money for retirement.

As FSAVCs are separate from your main scheme, you can usually begin to take money from this pot at any time after age 55. This can vary depending on your scheme’s rules, so check with your provider.

The value of your pension pot will depend on:

• how much you’ve contributed to the FSAVC scheme
• how long each contribution has been invested
• how your investments perform over time.

Here is on overview of some of the more common options offered:

Instead of contributing additional money to be invested as with a Defined Contribution scheme, the money you pay into a defined benefit AVC is used to buy extra time in the employer’s defined benefit pension scheme. These ‘added years’ increase the pension benefits that you can get when you retire.

You make additional contributions which are used to buy an amount of guaranteed scheme pension, for example £15k to buy £1,000 of extra annual income for life. It doesn’t change the way your main pension income is calculated - you just get an additional amount of pension when your main scheme pension comes into payment.

Similar to the above – you make additional contributions to buy a tax-free lump sum at retirement.  The idea here is that you need to give up less of your pension to get a tax-free lump sum when you reach retirement.

The amount of pension you earn each year is determined by what is known as the ‘build up’ or ‘accrual’ rate which is usually shown as a fraction of your earnings. 

You make higher contributions in return for building up your pension at a faster rate than normal under the scheme. For example, you may be in a scheme which builds up at a rate of 1/57 so you earn a pension each year of 1/57th of your earnings.  But you can pay a higher level of contributions to make it build up quicker, so 1/55th or 1/50th of your earnings, for example. 

If you earned £28,000 in a year, for example, you would earn a pension for that year of 1/57th of £28,000 which is £491. If as a result of your making higher contributions the build up rate was 1/55th then you would earn a pension for that year of £509 instead. 

Most defined benefit schemes have a normal retirement date that they’ll pay your retirement income from. If you want to begin receiving your income earlier than this, the scheme will often reduce the income they offer you due to the expectation that it will need to pay out to you for a longer period. 

With this option, making additional contributions will mean you can take your pension earlier than you normally would be able to take it, without it being reduced. 

This is not an exhaustive list – there are other options not mentioned above. Speak to your pension provider/scheme administrator who can explain all the options available to you and how they work.