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Topping up your pension with AVCs

Company ('occupational') pension scheme contributions are normally made up of:

However, you might want to increase the value of your pension fund to provide additional benefits for yourself or your family, or because you started saving for a pension later in life.

One option is to make 'top up' payments from your salary, so you'll receive a larger pension when you retire. These payments are known as AVCs and were offered by all company pension schemes up until April 2006.

Advantages of AVCs

You benefit from:

Some companies may no longer offer AVCs following changes to pension rules in April 2006, as there are now more options for topping up your company pension through other means.

• Pension rules from April 2006

How AVCs are used by your pension fund

The benefits you'll receive from your AVCs will depend on the type of company scheme you're in, and the rules of the scheme.

Money purchase scheme

With a money purchase scheme, your contributions (and those of your employer) are invested by an insurance company or a professional manager. The amount of pension you get depends on how much you've contributed and how well the investment has performed.

When you retire, the whole fund – including your AVCs – is used to buy your pension.

Final salary (defined-benefit) scheme

With a final salary scheme, the amount you get is based on your salary and the number of years you've been in the scheme. Sometimes AVCs increase the number of years your benefits are based on; sometimes they build up a separate fund to buy extra benefits.

You'll need to talk to your pension scheme administrator to find out about your schemes rules.

• More about AVCs on The Pensions Advisory Service website Opens new window
• Learn more about AVCs on the Financial Services Authority website Opens new window

AVC refunds

If you die, your AVCs are usually repaid - together with any interest earned. However, this depends on the rules of your scheme, so you'll need to check with your pension scheme administrator.

• What happens to your company pension when you die

Free-standing AVCs

Free-standing AVCs (FSAVCs) differ from ordinary AVCs because they're:

The advantages of FSAVCs are:

However, the administration costs will usually be higher.

• Read about FSAVCs at The Pensions Advisory Service (TPAS) website Opens new window

Pension rules from April 2006

Up until April 2006, restrictions on how much you could put into a company and personal pension at the same time meant that AVCs sometimes offered the only option for topping up your pension.

However, following the April 2006 changes, you can now save as much as you like into any number of pensions schemes (company and personal - including stakeholder), including through AVCs and FSAVCs. You will get tax relief on your contributions of up to 100 per cent of your earnings each year, subject to an upper 'annual allowance'. (Savings above the annual allowance and a separate 'lifetime allowance' of total pensions savings will be subject to tax charges.)

• Pension rules from April 2006

Where to get help and advice

A number of organisations offer free information on the different ways you can save for your pension but they can't give you financial advice tailored to your needs. To understand the best options for you it's a good idea to get financial advice.

• Getting information and help with pensions
• Choosing and using a pensions adviser

More useful links

• Getting information and help with pensions
• Contact details for the Pension Advisory Service
• Choosing and using a pensions adviser
• Use the FSA pension calculator Opens new window
• Pension scheme information from the HM Revenue and Customs Opens new window
• Use the FSA stakeholder pensions decision trees Opens new window