AVC Pensions
Our goal is to build long term relationships with each and every one of our clients. We take the time to get to know our clients and understand their objectives and priorities.
Get In Touch
AVC Pensions
We discuss AVC pensions with Keith Clissold from Austin Chapel.
What is an AVC pension and how do they work?
AVC stands for an additional voluntary contribution – and that allows you to top up or increase your existing final salary pension. Usually it’s invested in order to grow. You do have to make sure that your investment is in the right places, but at the same time, some plans will allow you to pay extra into your final salary fund .
That isn’t invested, but it increases your number of years’ service which will also increase your pension when you come to retire.
How much of my salary can I put into AVCs?
Surprisingly, under current tax laws you can pay up to 100% of your salary in. Your employer can also contribute into an additional voluntary contribution arrangement. This is known as a shared cost AVC and it’s subject to your scheme rules.
You need somebody to have a look at the scheme rules, if you don’t understand them yourself. Usually there’s help within your organisation to tell you what you can and can’t do.
I doubt that very many people would put 100% of their salary into this type of arrangement but sometimes it helps. If you really want quite a big boost and you have got the funds available, you can do that.
You really do need to make sure you’re receiving the correct advice for this though. If you make a mistake that can cost you in terms of tax. You need to have somebody who understands what they’re doing – either somebody within your organisation or a financial adviser who’s competent in this area.
Are AVC pensions worth it?
Any pension is worth it. The main reason is because you benefit from tax relief at your marginal rate for every pound that you pay into it.
For example, if you pay tax at 20% and you paid £100 a month of contributions, it will only cost you £80 to do that. So £80 would come out of your bank account and £100 would go into your pension.
Ah, if you’re a 40% taxpayer the same rule applies – you’d only pay £60 in every £100 invested. You also have the benefit of potential growth, although there are obviously potential losses as well. Once again, a financial adviser fits in there.
You must review what you’re doing because things change so much. If your employer offers AVCs, they can be a flexible way of topping up your retirement savings. You can make either regular or lump sum payments at any time.
You can also transfer your AVC to a new employer should you change jobs, providing the schemes are compatible.
Can I withdraw my AVC as a lump sum?
You most definitely can. But again it depends on the scheme rules. Most allow you to take 25% tax-free – but some actually let you to take 100% tax-free.
Have somebody look at your scheme rules. But yes, it’s a very nice, lucrative amount if you can take 100% tax free and it suits your circumstance at that time.
When can I withdraw my AVCs?
I keep harping on about scheme rules, but I have to because they’re all different. You really do have to check. Generally, you can withdraw your AVCs at age 55 currently.
Some will allow you take them plus the main scheme benefit it’s attached to, and some won’t, so you do have to be careful. However, as of 6 April 2028, the earliest you’ll be able to take your benefits will increase to age 57 – so it depends on how old you will be at that time.
Do I pay tax on an AVC?
Yes, you do pay tax on the income once you start drawing it out. All pensions are classed as earned income.
You’ll pay tax at your marginal rate at that time in your life. If you’re a 20% taxpayer you’ll pay 20%, if you’re a higher rate taxpayer it’s 40% – it’s the same as your salary.
You’ll get your allowance which I think is £12,500 at the moment, and that will change throughout your lifetime.
Some people don’t think this is fair – you’ve saved all this money and know you will be taxed on it. But don’t forget you’ve already had an additional 20% or 40% paid in, plus you’ve had growth on that.
Do I have to take my AVC when I retire?
I sound like a broken record, but again it depends on the scheme rules. Not all scheme rules are the same, which really demonstrates how taking independent financial advice is paramount when planning for your retirement. You don’t want to get it wrong.
Speak To an Expert
Here to offer guidance on financial planning for people’s needs, both now and in the future. We use our expertise to offer financial solutions that fit each person’s needs and requirements.
What are the alternatives to an AVC pension?
There are alternatives. You can start your own personal pension plan to run alongside your final salary scheme. I have to be careful here because I would never advocate anybody to stop paying into a final salary scheme and start paying into a personal pension. So don’t get the two things mixed up.
You can run a personal pension alongside it, but 99.9% of the time you’re better off staying in your final salary scheme because it’s guaranteed. You can take out what’s called a free standing additional voluntary contribution. It is exactly the same as an additional voluntary contribution but it isn’t linked directly to your final salary scheme, so you have more options with that one.
With a personal pension, unlike an AVC, you have lots of flexibility. You can take tax-free cash up to 25% and not take an income at that point. That’s not the same for an AVC, where once you start taking any benefits you have to keep taking them.
With a personal pension you don’t have to do that. You might take a lump sum for something but you don’t want to take an ongoing income, as that’s going to push you into the next tax bracket. You can leave it there. You have the flexibility to draw down on that as you want to.
Equally, you can buy what’s called an annuity, which provides a set pension for the rest of your life – it will pay you till you die. That’s great if you live to 104, not so good if you take your pension at 65 and die at 66, because any money left in it goes to the government.
But what most people look at now is what’s called a flexible drawdown, so they take their income as and when they need it. Plus, that doesn’t preclude you from buying an annuity in the future. So if you see things differently in 10 years ‘ time you can buy an annuity then.
You can’t reverse it the other way – you can’t have an annuity and then decide you want to do drawdown. Once again, independent financial advice is vital.
How can a financial adviser help?
There been many different rules and regulations concerning pensions, AVCs and tax. Things change all the time.
Pension Freedoms was a massive thing, helping you do whatever you want with a pension, more or less. A finance adviser helps you decide what’s best for your individual circumstances and requirements, both now and ongoing.
I keep stressing the ongoing side, because that’s vital. Things change so dramatically. So we’ll carry out an assessment and provide you with all the alternatives to ensure you’ve got the right outcome. We’ll recommend the best options to fit your needs.
We’ll run you through all the facts and figures. Hopefully you’ll take your time over it and not make a hasty decision. We prefer people to do that. Without having all the options it’s very difficult to make the right choice, so you do really need to consult a financial adviser. Don’t be scared, we’re here to help.
The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.