Additional Voluntary Contributions (AVCs)

Additional voluntary contributions (AVCs) are extra amounts of money which you may choose to save in order to enhance the pension you will receive on retirement. If you're in a company pension scheme, you may contribute up to 15% of your remuneration into a pension. If you are not already putting this much into your company scheme, you may invest all or part of the balance into an Additional Voluntary Contribution.

There are two basic types of AVC. Your employer's pension scheme will offer the option of AVCs to the company pension scheme. If you are a member of a defined benefit (final salary) pension scheme, your AVCs will be used to fund greater pension entitlement - buying extra years to be taken into account in the calculation of your benefits. If you are a member of a defined contribution (money purchase) pension scheme, your AVC should increase the size of the pot of money with your name on it.

The second type of AVC is known as a free-standing additional voluntary contribution (FSAVC). This "does what is says on the tin" - it is a pension savings policy that exists separately from the company scheme. It is more flexible - you get to choose what you invest in, how you invest and, if you change jobs, you may continue to invest in your FSAVC. However, if you make AVCs to your company's pension scheme, you are likely to find the administration costs are much lower than in an FSAVC, so more of your cash actually gets invested.

Whichever AVC option you choose, your total pension contributions must not exceed 15% of your earnings in any tax year. There is tax relief on AVCs in the normal way, so a basic rate taxpayer, paying tax at 22%, who puts in £78 a month, will effectively get the benefit of contributions of £100.

Both AVC and FSAVC investments are considered together with your occupational pension scheme when calculating your maximum benefit entitlement. Neither an FSAVC nor a main scheme AVC taken out after April 8, 1987, may be used to produce a lump sum.

Visit Moneyextra's Pension section .

Last Updated: February 2007 © Moneyextra.com

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