AVC means exactly what you think, an additional voluntary contribution to your pension scheme.
This is where you can top up your company pension by paying into an additional pension plan.
If you are a member of a company occupational pension scheme you may be allowed to invest in an Additional Voluntary Contribution Scheme.
Two types of scheme
- Company Sponsored Additional Voluntary Contribution Schemes CSAVC's
- Free Standing Additional Voluntary Contribution Schemes FSAVC's.
Many people have old AVC schemes that were taken out before pension rules were simplified in 2006. They may have important cash lump sum benefits that you should take expert pension advice on to protect them.
25% Tax Free Cash Benefit
- You are now allowed to withdraw up to 25% of the fund value as a tax free lump sum when you retire.
- Under the old rules before April 2006, you were not allowed to take tax free cash from an AVC at retirement (unless started before 8 April 1987) and all benefits must have been taken as a pension income benefit. Although the benefit built up in your AVC could be used to increase the tax free cash that you could take from your main pension scheme.
100% Tax Free Cash Benefit - The Best Reason to have an AVC!
- If you have AVCs, whether company AVC or freestanding AVC, you may be eligible to receive up to 100% of the fund as tax free cash at retirement.
- How? Your AVC is linked to your company pension scheme. If your main company pension scheme has great benefits such as inflation increases and guarantees, you may not wish to take a lump sum from it and therefore a lower pension. In these cases, you are allowed to augment your benefits. Quite simply, you are allowed to take all of the tax free cash lump sum you are entitled to from the AVC and leave the main company pension scheme benefit to provide you with that all important high, inflation linked pension income.
Why make additional pension savings?
You may not have built up a large enough pension fund for your retirement. You may have moved jobs frequently and either have not built up pension benefits or had some restrictions or penalties on your previous scheme. Why not visit our Preserved Pension Analysis Service? You may have additional taxable benefits such as a car or private medical insurance, which you pay tax on and are therefore allowed to make additional pension contributions based on these. The pension benefits that you are accruing may only be based on your basic salary, if you earn overtime or bonuses you may wish to fund to replace these. You may just wish to plan to retire earlier, to do this you may need to save a little more.
How much can I pay? As much as you like.
- You are limited by your salary and budget in terms of the total amount you can afford pay into any pension scheme and receive tax relief.
- Legal Maximum: The total amount you and your employer can pay in each year is limited to the Annual Allowance - £50,000 then reduced to £40,000 April 2014.
- Ycan pay more in than the Annual Allowance but there are huge tax penalties.
Types of Scheme
CSAVC's are schemes that are sponsored by your employer and generally linked to your main scheme. You are allowed to make additional contributions to this scheme whilst you are a member of the main scheme. You generally do not decide which company runs the scheme but you may have a choice on where your pension savings are invested. Some employers provide an extra benefit by paying for part or all the charges that are on such a scheme which can make them a very attractive way to save. Before making any decisions about additional schemes you should find out what your main scheme offers.
FSAVC’s are your own choice additional contribution scheme. It is advisable to be a member of your company pension scheme before you set one up. You then can choose your own additional contribution scheme provider and where the money is invested.
AVC Availability: Under Pension Simplification Rules the market for new AVC schemes is smaller as people do not have the restrictions of only being able to start an AVC scheme if they are in a company pension and only being able to start a personal pension if they were not in a company scheme. Many people now pay into their company pension scheme as well as private pension schemes. Before the pension simplification rules started in April 2006, if you contributed to a personal pension type arrangement you were not allowed to contribute to an AVC. Likewise, if you are a Controlling Director you were not allowed to contribute to an AVC (visit Executive Pensions to see how a Controlling Director can improve pension benefits.
2. Old AVC Rules (before April 2006)
Maximum Pay In: The overall maximum an employee used to be able to pay into occupational pension schemes (including any additional voluntary contributions) was 15% gross of tax relief (see Tax benefits for the difference between gross and net of earnings. For example, if you paid in 5% of your earnings into your main pension scheme then the maximum you could pay into an AVC was 10% of your earnings. Note this could not be exceeded although when Stakeholder Pensions commenced this changed for certain people with earnings below £30,000.
Headroom Check: Under the old pension rules before April 2006, if you decided to contribute more than £200 per month (£2,400 pa) the pension scheme provider would complete a "headroom check". This meant that they would normally ask you to complete an additional information form about your main company scheme and would then check to ensure that your main pension benefits together with FSAVC do not exceed the maximum benefits allowed by the Inland Revenue. The new annual allowance limits have removed the need for a headroom check.
You were allowed to contribute up to £3,600 into a Stakeholder Pension with no checks on your earnings even if you were a member of a company occupational pension scheme. This rule only applied to people who earned less than £30,000. This proved a favourable alternative to AVC’s as you were not restricted to a percentage of your salary as an overall contribution as you were with AVC’s.
The new annual allowance limits have removed the restriction on being able to be a member of a company pension, an AVC and a private pension.
Speak to an adviser now to discuss your AVC and get a free consultation to secure your retirement and/or tax free lump sum.