Making Additional Voluntary Contributions (AVCs)

If you're in an occupational pension scheme and would like to increase the amount of your pension benefits, then you may want to consider making Additional Voluntary Contributions (AVCs). .The total amount you can pay into all your pension arrangements each year, including any AVC scheme, is limited to either of 100% your earnings or £255,000 (2010/11 tax year), whichever is lower.

Traditionally, all companies offered this scheme; however, following changes to pension rules in April 2006, there are now more options to pay extra funds into your pension (for example, personal pensions and stakeholder pensions), and so some companies may no longer offer AVCs. An 'in-house' AVC scheme is an arrangement run through your employer's pension scheme. This tends to be cheaper than topping up pensions through other means as the employer normally bears the cost of administration of this scheme.

Benefits and Risks of AVCs

Some of the benefits of AVCs include:

• Tax relief on your contributions (up to certain limits)
• Lower administration charges (in most cases) than if you invested into a separate pension scheme
• The opportunity to stop or vary the amount you pay.
• Some schemes may allow you to take a tax-free lump sum from your AVC fund.

However, if your AVCs are used to invested to build up a fund, then, like all investments, there is no guarantee that your contributions will perform as well as you might hope for.

Types of Additional Voluntary Contributions

1. Added Years

If your AVC scheme permits you to buy added years, you will be able to increase the number of years of service you have in your main pension scheme, boosting the amount of pension that you will receive and your tax-free cash allowance when you retire. The cost of these AVCs will depend on how many years you want to buy and certain factors such as your salary and age and salary. This type of scheme is typically used with final salary (defined-benefit) pension schemes.

2. Money Purchase AVCs

The majority of AVC schemes are money purchase, which means that your contributions are invested, usually with an insurance company, to build up a fund. The amount of pension you'll receive will depend on how much you've contributed, and how well the investment has performed.

In most schemes, any AVCs you've made, together with any interest earned, will be repaid if you die.