If you have a workplace pension, Additional Voluntary Contribution (AVC) and Free Standing Additional Voluntary Contribution (FSAVC) schemes allow you to increase the amount of benefits you receive at retirement by paying extra contributions. There are different ways of doing this and each buys you different benefits. Different pensions also offer different options.
How AVC and FSAVC schemes work
Additional Voluntary Contributions (AVC)
An AVC pension allows members of workplace pension schemes to build up pension benefits in addition to the standard benefits provided by their scheme. Think of it as topping up your pension savings.
These are set up by an employer or the trustees of an employer’s pension scheme. They are designed to sit alongside the main workplace pension scheme.
With an AVC pension, the contributions are usually deducted from your salary and sent to the pension scheme by your employer.
There are two main types of AVC schemes:
Defined Contribution AVC scheme
Be aware
If your main scheme is a defined benefit scheme, in some cases, your AVC pension can be used to take tax-free cash from instead of taking it from the defined benefit scheme. This could be a valuable benefit, so you should check with your pension scheme administrator.
With a Defined Contribution (DC) AVC scheme, you make contributions which are then invested to give you a pot of money for retirement.
You can begin taking money from this pot, potentially, from the age of 55 (57 from April 2028), at the same time or after you begin taking income from the main scheme. The exact timings will depend on your scheme’s rules.
The value of your pension pot will depend on:
- 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.
Defined benefit AVC scheme (sometimes called ‘added years AVC’)
Defined benefit pensions pay a retirement income based on your salary and the length of time you were a member of the pension scheme with pension contributions being made.
Speak to your employer for further details about the scheme and what you would get.
Free Standing Additional Voluntary Contributions (FSAVC)
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 (57 from April 2028). 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.
Are AVCs and FSAVCs a good investment?
That really depends on you. The arrangement and type of pension you have, where your scheme invests your payments, any charges and any other circumstances that affect your retirement will all be a factor in whether these payments will be the best use of your money.
Here are the benefits of saving into an AVC:
- They can help you build up extra benefits for retirement.
- They may be cheaper when compared to the costs of setting up a pension yourself.
- They can offer you the flexibility to be able to stop or change the amounts you contribute over time.
- You’ll receive tax relief on your contributions (up to certain limits). For more information see our guide How tax relief boosts your pension contributions.
There are lots of benefits to saving with AVCs and FSAVCs (as set out above), and putting extra aside for your retirement is always worth it, even if you decide to save in a way that does not involve AVCs and FSAVCs.
Find out more about Defined Contribution and defined benefit schemes in our guide The different pensions you can get if you live and work in the UK
Find out more about tax and your pension in our section Tax and pensions
Different pensions offer different options
Here is on overview of some of the more common options offered:
Added years
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.
Added pension
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.
Purchase a lump sum
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.
Enhanced build up
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.
Earlier retirement age offset
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.
Other options
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.
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