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Wednesday, 3 October 2023

Workplace pensions - making additional voluntary contributions to increase your pension

Additional voluntary contributions (AVCs) offer a cost-effective way to increase your pension pot if you have a workplace pension. Learn more about the different ways of paying extra into your pension

About additional voluntary contributions (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

Additional voluntary contributions (AVCs) are extra pension contributions that you can make to top up your pension.

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')

Topping up an existing workplace pension

If you want to top up an existing pension, you should check with your scheme to see if:

  • you can pay additional voluntary contributions
  • your partner or another person can make third party contributions, some defined contribution schemes allow this

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 were the only option for topping up your pension.

However, in April 2006, those restrictions were removed and you can now save as much as you like into any number of pensions schemes. This includes workplace, personal and stakeholder pensions.

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. See the link 'Pension rules from 2006' for more information on 'annual allowance'.

How AVCs are used by your workplace 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 contribution pension schemes (including all personal and stakeholder pension schemes)

The value of your pension pot is based on the amount of money paid in and how well it has been invested. The whole pension pot, including your AVCs or any third party contributions, will be used to provide for your pension income.

Defined benefit pension schemes (final salary schemes)

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.

To find out more you'll need to talk to whoever runs your pension scheme about your scheme's 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.

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.

Additional links

Being enrolled into a workplace pension

Starting from October 2012, millions of workers will be enrolled into a workplace pension

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