What is an AVC pension?

An AVC pension is an 'additional voluntary contribution' pension that you can build alongside your workplace pension scheme. It can be a tax-efficient method of boosting your retirement savings as any additional voluntary contributions you make to your pension are deducted from your wages before tax. AVC pensions are particularly useful if you’ve put off saving for retirement until later life or have disposable income that you’d like to save efficiently.

How AVC pensions (AVCs) work

AVC pensions (AVCs) are offered by your employer or its board of trustees, depending on the company you work for. How it could benefit you will depend on the type of workplace pension you have in place.

Defined contribution AVC pension

If you have a defined contribution pension, you’ll be able to join a defined contribution AVC scheme. The money you pay into an AVC scheme will be invested and the value of your pension will be based on how much money you pay in and how your investments perform over time.

Defined benefit (added years) AVC pension

If you have a defined benefit pension you can save any extra contributions into a defined benefit AVC or what’s called an ‘added years AVC’. As defined benefit pensions pay a retirement income based on your salary and the number of years you’ve worked for your employer, defined benefit AVCs are quite different to defined contribution AVC schemes.

Instead of contributing additional money to be invested, the money you pay into a defined benefit AVC will be used to buy extra time in your employer’s defined benefit pension scheme. This can then be used to increase your pension benefits upon retirement.

Are AVCs a good investment?

Provided that your current employer offers AVCs, they can be a flexible way of topping up your retirement savings as they allow you to make either regular or lump sum payments at any time. You can also transfer your AVC to a new employer, should you change jobs, as long as they have a compatible scheme.

Paying additional voluntary contributions

You can pay as much or as little as you like into your AVC pension as long as you don’t exceed the pension contribution limit, which applies to all of your pensions. For 2024/25 this limit is set at 100% of your income, with a cap of £60,000.

Do AVCs reduce taxable income?

AVC pensions qualify for tax relief from the government. The standard amount of tax relief is a 25% tax top up for basic rate taxpayers, meaning that if you put £100 into your pension pot, HMRC effectively adds another £25.

Withdrawing your AVC pension

It’s possible to cash in an AVC pension at the age of 55 (57 from 2028), no matter if you’re still working or intend to retire. How you choose to cash in an AVC at 55 will depend on the rules of the scheme. It may be possible to withdraw it all as a lump sum, keep your money invested via drawdown or purchase an annuity.

However you decide to access your AVC pension, after the first 25% tax-free amount, income tax will be charged at your highest rate.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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