A recent survey into pension additional voluntary contributions questioned whether employees actually understood what they were paying into. Many people pay additional voluntary contributions and see them as just a boost to their pension, not as an investment that can fluctuate in value.
Types of AVC scheme vary, especially depending on the type of pension scheme your employer offers. What people fail to realise is that the money they pay into 'money purchase' or 'defined contribution' AVC's is not guaranteed but could be linked to stock market investments. People that pay AVC's and buy added years in their 'final salary' or 'defined benefit' pension scheme actually buy extra time in their pension scheme.
For example, if you had built up 20 years in your pension scheme and paid AVC's, you could end up with, say 22 years credited service. However, the money you pay into money purchase AVC's is generally invested in a fund of your choice, through the company offering the AVC. Money could be invested in a wide range of funds such as managed funds, with profits funds and property funds. The choice will depend on the range available from the AVC provider.
What you get back at retirement from these types of AVC scheme is not guaranteed. You will only get back the value of the fund in the form of a pension. And, as most people know, fund values rise and fall on a daily basis.
People must be aware of the risks involved where money is invested for retirement. If it is exposed to the stock market and you are approaching retirement you run the risk of having a smaller pension pot, if the value of your fund falls just before retirement.
As an example, the survey mentioned that the best performance of money purchase AVC's over a five-year period had managed around 6.4% each year. The worst was -9.3% each year.
Our View:
Pensions are complex and people should not assume they will retire comfortably. This survey highlights the need to understand what you have and what it will do for you. Pensions should be reviewed regularly and do read the statements you receive. If you do not understand them, ask. Proper planning is vital for a comfortable retirement.
Learn more about pensions and additional voluntary contributions in the Pensions Adviser.com .
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