Topping up an Occupational Pension

Occupational pension plans usually require you to make a regular contribution based on a percentage of your salary - normally it is 5% of your gross salary. These contributions are deducted through your employer's payroll and attract tax relief. Your employer will also make contributions into your pension, and will also pay a substantial part of the administration costs of the pension scheme. From 6 April 2006, the limits placed on how much you could contribute into your pension were removed. You can now contribute as much as you like into several different pension schemes every year, and the only restrictions are the level of tax efficient pension saving you can make. The maximum amount you can contribute to a pension plan, and on which you can receive tax relief, is 100% of your earnings or £3,600, whichever is greater. 

Making Additional Voluntary Contributions (AVCs)

Additional voluntary contributions (AVCs) offer a cost-effective way to increase your pension pot if you have an occupational pension. The total amount you can pay into all your pension arrangements each year is limited to either of 100% your earnings or £275,000 (2011/12 tax year) - whichever is lower.

  • Additional voluntary payments are usually made up of:
  • Contributions from your employer;
  • Your own contributions;
  • Contributions from the government (in the form of tax relief).

Usually all companies offer this option, but following changes to pension rules in April 2006, there are now more options to pay extra funds into your pension and some companies may no longer do that. 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.

If you die, your AVCs are usually repaid together with any interest earned (but this depends on the rules of your scheme).

Types of Additional Voluntary Contributions

  • Money Purchase AVCs

The majority of AVCs are money purchase schemes, which means that your contributions are invested, typically with an insurance company, to build up a fund. The amount of pension you will receive when you retire will depend on how much you have contributed, and also how well your investment has performed.

  • Added Years

If your AVC scheme allows you to buy added years, it will be possible to increase the number of years of service you have in your main pension plan, increasing the amount of pension that you will receive and your tax-free cash allowance when you retire. This type of scheme is typically used with final salary pension plans. The cost of these AVCs will depend on how many years you want to buy and certain factors, like your age and salary.

Benefits and Risks of AVC scheme

The main benefits of AVCs include:

  • The opportunity to vary or stop the amount you pay;
  • Lower administration charges than if you invested into a separate pension scheme;
  • Tax relief on your contributions (but only up to certain limits);
  • Some AVC schemes may allow you to take a tax-free lump sum from your AVC fund.
  • If you die, your AVCs are usually repaid together with any interest earned (but this depends on the rules of your scheme).

However, if your Additional Voluntary Contributions are used to invest and build up a fund, then there is no guarantee that your contributions will perform as well as you might hope for.

Making Free Standing Additional Voluntary Contributions (FSAVCs)

A Free-Standing Additional Voluntary Contribution scheme is a form of Additional Voluntary Contribution (AVC), where payments are made to an external provider, not through the pension scheme provided by the employer.

FSAVCs are typically more expensive to set up and run than 'in house' AVCs since they do not have the sponsorship of the employer.

FSAVCs gives it’s members the opportunity to carry on contributing even if there is a change of employer or change of the main scheme, as well as provides an option to choose the investment medium and provider. However, contributions to this pension scheme can be made only by a member of company pension scheme. In case a member leaves their company pension scheme and does not join a new one, they must stop their FSAVC payments.