additional voluntary contribution

What is an AVC pension scheme?

Additional voluntary contributions (AVC) are a type of pension scheme which allows you to accumulate pension savings typically alongside your employer’s pension scheme.

Using an AVC may be a good way to avoid paying income tax on your income, since any additional voluntary contributions made, via your employer, are deducted from your wage before are liable to income tax.

There are several questions often asked by those considering investing in AVC schemes alongside their workplace pension. This article will, therefore, seek to answer some of the frequently asked questions, including:

  •         What is an AVC pension scheme and how do they work?
  •         Are AVCs considered a good investment?
  •         Am I able to cash in my AVC at 55?
  •         What is a freestanding AVC?
  •         What are the advantages and disadvantages of an AVC pension scheme?

What is an AVC pension scheme and how do they work?

Offering the ability to build a tax-efficient savings alongside your workplace pension, an AVC pension scheme can be particularly useful if you have deferred from saving until later on in life, or if you have a disposable income that you would like to invest both efficiently and safely.

Depending on your employer, you may be offered the chance to join an AVC pension scheme, and any associated benefits or potential drawbacks are dependent on your workplace pension plan.

An AVC may be offered by your private sector employer or a public sector AVC scheme; and these can be found in local government, NHS, teaching and University professions.

If you are part of a defined contribution scheme, then you are entitled to join a defined contribution AVC scheme.

In a defined contribution pension scheme, the value of the pension sum available to you upon retirement is dependent on how much you have paid into the scheme, along with how well your investments have performed.

Similarly, any money you then invest into the defined contribution AVC scheme will be invested elsewhere, and the value of your AVC pension savings is dependent on how much money is paid into the scheme, and how well your consequent investments perform.

On the other hand, if you are part of a defined benefit (DB) pension scheme, any extra savings you wish to contribute can be paid into a defined benefit AVC which can also be known as an added years AVC. 

This means that the value of your AVC fund will be converted at retirement and used to buy ‘added years’ in the DB scheme.  Therefore, one main difference includes the fact that any additional money you wish to save is not invested, it is instead used to extend the period in your employer’s defined benefit scheme, which can lead to an increase in your post-retirement savings.

avc pension tax relief

Investing your AVC

With complete control over the level of AVC to be paid, your contribution will be invested into funds which are then invested in shares, bonds, property and/ or cash. These investments can either increase or decrease from their original value, and any additional AVC funds available at retirement can be combined with your employer retirement savings.

You might consider joining an AVC pension scheme if you wish to increase employer pension benefits, should they not currently reach the maximum benefits you can access at retirement.

This shortfall can arise through several different avenues, for instance, if you have not reached the maximum 40 years of service by the time you reach retirement age.

This article by the Guardian highlights some of the benefits associated with AVCs, while this YouTube video by PensionBee gives a brief overview of AVC pensions and how they work.

What is a freestanding AVC?

A free-standing AVC (FSAVC) is an alternative form of an AVC pension that is not connected to your employer’s pension scheme. Often offered by insurance companies, FSAVCs work in a similar manner to defined contribution pension schemes.

If you join an FSAVC scheme you are permitted to make additional voluntary contributions separate from the pension your employer is providing you. The amount paid into the FSAVC is entirely up to you, meaning you can invest all of your taxable earnings while being eligible for tax-relief.

When considering whether an FSAVC is a suitable option for your circumstance, it is important to take into account the insurance company’s charges, any alternative investments available and the history of any investments you have made.

Are AVCs considered a good investment?

Whether or not AVCs are considered a good investment is entirely dependent on your own financial circumstance and what you wish to get out of any investments and your own requirements going into retirement.

For instance, an AVC is probably not the best idea if you are likely to need the money before reaching retirement, as you cannot withdraw it once invested. However, if you have a disposable income or are willing to invest some extra money, then AVCs may be a suitable and efficient way of gaining tax-relief on your income for later use.

Even if you have not paid into an AVC late into your working career, it isn’t too late to start. If you are a high-rate tax payer, it is a good way to gain some tax-relief on any investments.

defined contribution

What are the advantages and disadvantages of an AVC pension scheme?

There are many factors you must take into consideration if you are debating joining an AVC pension scheme. The following advantages and disadvantages will hopefully provide some clarity and answer some potential questions.


  •         In an AVC pension scheme, you are entitled to tax-relief on all contributions that you make, making it a useful method to avoid paying more tax if you are currently a high-rate payer. This can lead to a considerable boost to any investment you make, although you may be liable to pay income tax on any other pension income.
  •         You can maximise the tax-free benefits you are due to receive at retirement.
  •         You have a large range of investment options available to you, and these can accumulate tax-free benefits/
  •         If you are a member of a defined benefit pension scheme, by having a large AVC fund available you can withdraw what is known as a Retirement Lump Sum, without having to reduce any guaranteed retirement income.
  •         You can contribute as much as you want in an AVC scheme, although the tax-relief you are entitled to is dependent on your age.
  •         There are potentially lower administration charges in comparison to investing your funds in to a personal pension scheme
  •         There is some flexibility associated with AVCs, in particular, the control you have regarding how much is paid and when it is paid – you can stop payment whenever you wish.


  •         AVCs are typically less flexible than some pension schemes, due to the fact that they have a direct link to your employer’s pension scheme. This means that any money you do invest in to the AVC is locked until you begin drawing from your employer’s pension scheme.
  •         You are unable to borrow back from any of the contributions that you make.
  •         This makes AVCs unsuitable for those who may require the money invested before they reach the normal age of retirement.

Traditional AVC pension schemes have become out-dated in recent years as a consequence of their limited investment options and the pension simplification rules introduced in 2006.

As a result of this rule change, an employee can now be a member of their employer’s defined benefit scheme and a personal pension at the same time.

Since the changes in the pension rules regarding AVCs, those in charge of your pension scheme are obliged to inform you of their option to search for the best-value annuity available, also known as the open market option.

There is also debate over the regulation of investment performance and transaction charges, with little done to inform and advise investees about the performance of their investments and the dealing costs incurred on their funds.

 Am I able to cash in my AVC at 55?

It is indeed possible to cash in your AVC pension at the age of 55, even if you are still working with no intention of retiring. However, if you wish to cash in your AVC is entirely dependent on the rules of your scheme, including whether you are entitled to withdraw the full AVC as a lump sum, allow the sum to be re-invested through drawdown or purchase an annuity.

A key thing to remember is that however you choose to access any AVC pension savings, after the first 25% withdrawn is tax-free, any income after that will be taxed as income tax at your normal rate.

Where can I get pension advice?

If you are seeking pension or financial advice on a matter related to AVCs or FSAVCs, you can ask a professional here at UK Care Guide and we’d be happy to help you with any queries. It is also worth considering your own situation before deciding to join any scheme.