For many people approaching retirement, the realisation that their pension pot won’t stretch as far as they’d hoped comes later than it should. Additional Voluntary Contributions, or AVCs, are one of the most straightforward and tax-efficient ways to close that gap yet they remain widely underused. This is often because savers simply don’t know they’re available or how they work. This guide explains what AVCs are, how they fit alongside your main pension, the tax relief and rules that apply and the questions worth asking before you start paying in.
What Are Additional Voluntary Contributions?
Additional Voluntary Contributions are extra payments you choose to make into a pension scheme, on top of your normal contributions and whatever your employer pays in. They’re most commonly associated with workplace pensions. In particular, defined benefit (final salary) schemes, where AVCs offer a way to build additional retirement savings that sit alongside, but separately from, your main scheme benefits.
AVCs are entirely optional and are paid at your discretion, in whatever amount you choose within the rules of your scheme and HMRC’s overall pension limits. They’re typically invested and grow over time, much like contributions to a standard defined contribution pension and the resulting pot is usually used to supplement your income at retirement.
Types of AVC Schemes
There are two broad categories of AVC arrangement in the UK:
In-house AVCs
These are AVC arrangements linked directly to your employer’s pension scheme, often run through the same provider or trustee. Contributions are typically deducted straight from your salary, making them simple to set up and administer. In-house AVCs are common in public sector and defined benefit schemes, where they offer a way to top up benefits that wouldn’t otherwise flex with extra contributions.
Free-Standing AVCs (FSAVCs)
A Free-Standing AVC is a separate pension arrangement, taken out independently of your employer’s scheme, though contributions can often still be made through payroll. FSAVCs give you more control over investment choice and provider, since you’re not restricted to whatever fund options your employer’s scheme offers — but they can also carry higher charges, so it’s worth comparing costs carefully against an in-house option.
Why Consider Paying Additional Voluntary Contributions?
AVCs appeal to savers for several distinct reasons, and the right motivation often shapes how much and how someone should contribute.
- Tax relief. Contributions to a registered pension scheme, including AVCs, qualify for tax relief at your marginal rate, subject to annual and lifetime allowance rules. For higher and additional rate taxpayers in particular, this can make AVCs one of the most efficient ways to save.
- Closing a pension shortfall. Many people discover later in their career that their expected pension income, particularly under a defined benefit scheme, won’t be enough to maintain their standard of living in retirement. AVCs allow catch-up saving without needing to open an entirely new pension arrangement.
- Flexibility around retirement benefits. Depending on the scheme, AVC funds can sometimes be used to boost your tax-free lump sum at retirement, rather than being drawn down purely as income. An option that can be particularly attractive for those approaching pension age with a defined benefit entitlement that offers limited lump sum flexibility on its own.
- Buying back missing pensionable service. In some defined benefit schemes, particularly within the public sector, AVCs can be used to purchase “added years” or additional pension, directly increasing your guaranteed retirement income rather than building a separate pot.
How Tax Relief Works on AVCs
AVCs benefit from the same tax relief as other pension contributions. Basic rate taxpayers receive relief automatically, effectively meaning a contribution is topped up by the government. Higher and additional rate taxpayers can claim further relief, usually through self-assessment, bringing the total tax relief up to their marginal rate.
This relief is subject to the annual allowance, which caps how much can be paid into pensions each tax year while still benefiting from tax relief and a reduced allowance may apply to high earners under the tapered annual allowance rules. Anyone considering a significant AVC contribution, particularly close to retirement or alongside other pension savings, should check their position against these limits before paying in, since exceeding them can trigger an unexpected tax charge.
Key Considerations Before Starting an AVC
AVCs are not automatically the right choice for everyone, and a few factors are worth thinking through carefully:
- Investment risk. Unlike the guaranteed benefits typically provided by a defined benefit scheme, AVC funds (particularly FSAVCs and in-house money-purchase AVCs) are usually invested in funds that can fall as well as rise in value. Understanding the investment options and risk level is essential before committing significant contributions.
- Charges. Fees vary between AVC providers and can meaningfully affect long-term growth, particularly for FSAVCs run through a separate provider. Comparing charges is worth the time, especially for larger or long-term contributions.
- Access and flexibility. How and when you can access your AVC fund, and whether it must be taken alongside your main scheme benefits or can be accessed separately, varies by scheme and is worth confirming before you start contributing.
- Alternative pension options. Depending on your circumstances, a personal pension, SIPP, or increased contributions to a workplace defined contribution scheme may offer comparable or better tax efficiency and flexibility. AVCs are one option among several, not automatically the best one for every saver.
Are AVCs Right for You?
AVCs tend to suit savers who are members of a defined benefit scheme looking to boost retirement income or lump sum flexibility, higher earners looking to make efficient use of pension tax relief, and those later in their career wanting to catch up on pension saving through a simple, payroll-linked arrangement. They’re less likely to be the best fit for someone who has already maximised employer matching elsewhere, who needs more investment flexibility than their scheme’s AVC arrangement offers, or whose personal circumstances mean a different pension vehicle would be more tax-efficient overall.
Because pension rules, tax relief, and scheme-specific terms can be complex and getting it wrong can mean paying more tax than necessary or missing out on valuable benefits, it’s worth taking independent financial advice before starting or significantly increasing AVC contributions. Particularly where larger sums or lifetime allowance considerations are involved.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks including the risk of possible loss of capital. Some information quoted was obtained from external sources we consider to be reliable.
Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314.
Tees Financial Limited is registered in England and Wales. Registered number 4342506.
