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AVC pensions - how they work

Journalist: Rachel Wait, Freelance

ended 14. September 2024

Looking for brief  expert comment on any of the following points about AVC pensions

  • What is an AVC Pension?
  • How do AVC pensions work?
  • Benefits
  • Drawbacks 
  • Accessing Your AVC Pension
  • Maximising Your Pension Benefits with AVCs
    • Are AVC pensions worth it?
    • Can I cash in my AVC before I retire?
    • Can I take all my AVC as a tax free lump sum?

5 responses from the Newspage community

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David Nicklin
SSAS Consultant at Retirement Capital
An AVC, or Additional Voluntary Contribution pension, allows employees to contribute extra money towards their retirement, supplementing their existing workplace pension. These contributions are flexible, tax-efficient and can significantly boost retirement pots. However, it's essential to weigh these benefits against potential drawbacks like investment risks and limits on accessibility. Accessing AVC funds can be done upon reaching the pensionable age, with up to 25% usually available as a tax-free lump sum. However, cashing in before retirement may lead to restrictions and tax implications, making it vital to consider long-term objectives and speak with a pensions expert. While AVCs offer a robust route to maximize pension benefits, individual circumstances will dictate their suitability.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
AVC stands for Additional Voluntary Contribution. These are usually schemes available to members of a workplace pension scheme who want to build up a separate pot to their main workplace pension.

This could be where the workplace pension is a final salary scheme which offers a guaranteed regualar income in retirement, but the AVC offers the chance to build a pot of money with greater flexibility over how and when it's taken.

The AVC pension pot will be based on the level of contributions and how it's invested.

There are sometimes links between the AVC and the workplace final salary pension where the AVC pot can be taken as a tax free lump sum, and the final salary pension can pay the maximum level of income without having to commute any to pay the tax free cash.

Every scheme is different though, so it's definitely worth speaking with a financial planner to understand the options and what's best in your circumstances.

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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
AVCs have long been considered the financial equivalent of packing an extra jumper for your retirement journey. They can offer a tax-efficient way for pension savers to boost their retirement income by making extra contributions alongside their main pension. These are typically invested in a separate pot and are particularly useful for higher earners constrained by annual allowance limits on their main scheme.

However, AVCs are not without drawbacks, as they often have less flexibility than personal pensions and may carry higher fees. Furthermore, access is generally restricted until retirement, though some schemes permit earlier withdrawals in limited circumstances.

Additionally, while AVCs can offer significant benefits, savers should carefully weigh these against alternative options such as ISAs or SIPPs. Pension planning is far from a one-size-fits-all system, so the suitability of AVCs will depend on individual circumstances, including tax position and retirement goals.
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Mark Scott
Director and IFA at Positive Advisers Ltd
AVCs work best for taxpayers with higher income rates because they attract tax relief at the source. If a higher-rate taxpayer were to make contributions to a personal pension, they would only get basic-rate tax relief at the time of payment and then have to wait until after they have completed their tax return to claim back the higher-rate tax relief, losing significant investment time over many years. The drawback with AVCs is that you are locked into an employer pension scheme that might have limited investment and retirement options. In my opinion, if you're a higher-rate taxpayer, AVCs are great. If you're a basic-rate taxpayer in a scheme offering salary sacrifice and saving National Insurance contributions, then AVCs are great. But if you're in a standard scheme, then seek independent advice. An independent financial adviser can provide advice on the pros and cons specific to your personal situation.
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Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
To this date, I am yet to have someone complain that they have too much money in their pension. Therefore, with only a few caveats, the more money you can get into your pension the better. AVCs are a good way to do this, however it can be more beneficial to set up a personal pension for your additional contributions, depending on the terms of the AVCs. Look around before rushing into it.