What is an AVC pension and how does it work?
We reveal the pros and cons of using an AVC pension scheme, what it is and how it works.
An additional voluntary contribution (AVC) pension is a way to make additional flexible contributions to your workplace pension.
You’ll enjoy government tax relief on anything you put in, up to your pension annual allowance of £60,000, and may also get other perks such as lifetime income from your contributions.
It’s often known simply as ‘AVCs,’ so employers may talk about ‘making AVCs’ to your workplace pension – but these additional contributions are typically held in a separate fund.
Here’s what you need to know about AVCs.
If you want to boost your retirement savings, then using additional voluntary contributions (AVC) could be a great option.
AVCs are linked to a workplace scheme, so you can’t pay into an AVC privately.
One of the biggest perks of an AVC is that you don’t have to commit to saving a set amount every single month.
Many public sector workers, such as teachers, NHS and local government employees, will have the option to join a public AVC.
What is an additional voluntary contribution (AVC) pension?
If you want to boost your retirement savings, then using additional voluntary contributions (AVC) could be a great option.
In the public sector and some defined benefit schemes, extra payments into your pension are known as AVCs.
In contrast, increased payments to a defined contribution scheme aren’t officially called AVCs. They’re pretty similar but are simply treated as higher contributions.
Here’s how paying extra contributions works for defined contribution and defined benefit pension schemes.
| Paying optional extra pension contributions | Defined benefit | Defined contribution |
|---|---|---|
| How your main scheme works | Your pension income is calculated based on the number of years worked, your earnings and your accrual rate. | Your pension income isn’t guaranteed. Instead, you build wealth in a pension to spend during retirement. The value depends on the amount contributed and the investment growth. |
| How additional contributions work | Additional contributions don’t change your main pension. Instead, they are invested like a defined contribution pension and can be used for extra income in retirement. | Additional contributions increase the amount invested in your pension pot and can help you build more wealth over time. |
Defined benefit schemes are more common if you work for the public sector, in the NHS, or as a teacher, as it can be expensive to maintain this type of scheme.
How does an AVC pension work?
You choose how much you contribute to your AVC pension every month. This amount can go up or down depending on how much you’d like to save.
If you have a defined benefit pension, then your AVC pension sits alongside your main one. It’s invested in the stock market, so the eventual value of your AVCs will depend on investment growth.
When you retire, you can choose what to do with your additional pension. For example, AVCs within the teachers’ pension scheme offer four options - adding to your tax-free lump sum, taking it as cash, buying more guaranteed income as an annuity or transferring out to another scheme like a self-invested pension scheme (SIPP).
AVCs are linked to a workplace scheme, so you can’t pay into an AVC privately. But you can choose to open an additional pension scheme to run alongside your workplace pension, such as a SIPP.
You can pay as much as you like into your AVC pension up to the pension annual allowance of £60,000, that applies to all your pensions collectively (except the state pension, which you don’t technically pay into).
What are the advantages of an AVC pension?
One of the biggest perks of an AVC is that you don’t have to commit to saving a set amount every single month.
While your employer may have a minimum contribution, you can also choose to save more whenever you can.
If you’ve got an expensive month coming up, you can cut your contributions back to the minimum without any penalties.
AVC pensions are eligible for government tax relief on pension contributions, which gives a significant boost to everything you save into them.
As a result, an AVC pension can be a particularly tax-efficient option for people with higher incomes, as it allows them to save more of their money to enjoy in later life.
What are the disadvantages of an AVC pension?
If you opt for an AVC pension through your employer, you won’t have as much flexibility as other private pension options.
The money tied up in your AVC may be locked until you begin taking money from the main pension scheme.
While some AVCs can be maintained if you move companies, you may not be able to continue building them if you leave your role.
As you are putting your money into an investment pot with an AVC pension, there is always a chance that the value of your pension fund could go down in the short term as well as up.
That said, pensions are a great option for long-term investors due to the tax advantages and being designed for use over the long term.
Can I take my AVC pension as a lump sum at age 55?
You can access an AVC pension from the age of 55 (57 from April 2028), regardless of whether you’re still working or not.
You can, of course, leave it invested to continue growing. You’ll need to check the rules of your chosen AVC, as defined benefit AVCs may not allow you to do this.
You can take up to 25% of any defined contribution pension as a tax-free lump sum.
However, if you take more, it will be taxed as income for that year.
Who typically takes out an AVC pension?
Many public sector workers, such as teachers, NHS and local government employees, will have the option to join a public AVC.
Many in the private sector are also drawn to upping their pension contributions, thanks to matched contributions or simply as a way to add more money to their pension.
You may also take out a private AVC pension if you’ve maxed out your allowance in other retirement-focused savings or investments, such as individual savings accounts (ISAs).
Higher earners often choose to increase their pension contributions when they enter a higher tax bracket. For example, someone who pays 40% income tax and earns £60,000 could save £4,000 in tax by paying £10,000 into their pension.
Don’t forget that pension contributions, including payments from your employer, are capped at £60,000 each tax year, or 100% of your earnings, whichever is lower.
Is an AVC pension a good idea for me?
If you’re looking to build a strong pension pot, an AVC pension can be a great option.
Even if your employer doesn’t offer a matched AVC pension, you can contribute as much or as little as you like every month.
Quite simply, all the usual advantages of a pension apply to an AVC pension.
What happens to my AVC pension if I die?
When you die, your AVCs will usually be paid out to the person you nominated on your expression of wishes form.
Generally, a lump sum totalling its value to date will be paid to your spouse or partner, or a dependant if you are single.
Find out more about pensions and inheritance.
What is a free standing additional voluntary contribution, and how is it different?
You can also contribute additional voluntary contributions without your employer setting the scheme up.
Free standing additional voluntary contributions (FSAVCs) are designed to supplement your company pension, but contributions won’t be taken from your salary, and they won’t be linked to your workplace scheme.
You’ll choose a pension provider, set it up yourself and pay contributions directly, but enjoy the same tax benefits as a company AVC.
What are the alternatives to an AVC pension?
There are many alternative options to help you build extra wealth for retirement.
If you don’t have the extra funds available for an AVC, your company pension alone is a valuable asset in its own right.
Other options to boost your retirement savings include:
Property investments (including buy-to-let)
How can I access my additional voluntary contribution pension?
When it’s time to access your pension (from the age of 55 or 57 from April 2028), you’ll need to contact your pension provider to discuss how you’d like to use the money.
Even if your pension has been set up by your employer, you should have been given details that let you view and manage your pension. The best approach for accessing your pension is to contact a financial adviser first.
Get expert AVC pension advice
An AVC pension is a flexible option that offers tax benefits along with increased retirement savings. However, there are pros and cons to consider.
Let Unbiased match you with a financial adviser for expert financial advice to help you optimise your retirement strategy.
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