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Topping up your pension with AVCs

Payments into your workplace pension are normally made up of:

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

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

Advantages of AVCs

You benefit from:

Some workplaces may no longer offer AVCs following changes to pension rules in April 2006. There are now more options for topping up your workplace pension through other means.

• Pension rules from April 2006

How AVCs are used by your pension provider

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

Defined benefit pension schemes (all personal pension schemes, including stakeholder pension schemes)

With a defined contribution pension scheme, your pension pot is based on the amount of money paid in and how well the investments have performed. At retirement, the whole pension pot, including your AVCs, is used to provide your pension income.

Defined benefit pension schemes (final salary schemes)

With a defined benefit pension 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 whoever runs your pension scheme to find out about your schemes rules.

• Guide to different types of pensions - Money Advice Service Opens new window

• Additional Voluntary Contributions (AVCs) on The Pensions Advisory Service website Opens new window

• Types of workplace pension schemes

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 whoever runs your pension scheme.

• 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.

Pension rules from April 2006

Up until April 2006, there were restrictions on how much you could put into a workplace and personal pension at the same time. This 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. This includes workplace, personal and stakeholder pensions, including through AVCs and FSAVCs. You'll 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.

• Pensions and financial advisers: who to contact

More useful links

• Contact details for the Pension Advisory Service

• Choosing and using a pensions adviser

• Pension scheme information from the HM Revenue and Customs Opens new window

• Use the Money Advice Service stakeholder pensions decision trees Opens new window

Useful contacts

• Money, tax and benefits contacts