AVC Pension and Defined Benefit AVC
An AVC pension is a type of defined benefit AVC where additional voluntary contributions (AVCs) are made alongside your normal contributions to your workplace pension. The AVC pension operates within your main scheme, and your employer setting plays a crucial role in determining the specific rules and benefits.
Alternatively, defined benefit AVCs are linked with defined benefit pension schemes, where your pension income is based on your salary and length of service. Creating AVCs in a defined benefit scheme can increase your retirement income, giving you a larger pension pot in retirement. However, the benefits received from your AVCs will depend on several factors, including the performance of your AVC investments (depending on the stock market) and the rules of your AVC scheme outlined by your employer.
Under a defined benefit AVC plan, your additional contributions are invested to provide you with returns in the form of additional income (or a lump sum) when you retire. This is managed by your AVC provider, often your employer or a third-party pension provider.
However, AVCs in a defined benefit scheme often contain certain restrictions. For example, you may not be able to take your AVC benefits simultaneously with your main scheme benefits. You may also have multiple options for taking your AVC benefits, such as a tax-free lump sum or extra pension income.
Workplace Pension and Shared Cost AVC
Your workplace pension is the main pension scheme provided by your employer, and it includes your normal contributions and any AVCs you make. These payments sit alongside your workplace pension, serving to top up your pension benefits. Employers may offer a shared-cost AVC scheme, both you and your employer contributing. This can make AVCs a cost-effective way to increase your pension savings.
In an alternative scenario, a shared-cost AVC scheme involves your employer and you both making contributions. These are typically deducted from your salary before tax, therefore providing tax relief for you from your overall tax bill.
Your AVCs are invested to grow your pension. The performance of these investments will determine the benefits you receive from your AVCs. It’s important to understand the risks associated with investing in AVCs. Although they offer the potential for higher returns, your investments could also decrease in value depending on the position of the stocks.