Additional Voluntary Contributions Explained

By: Priyanka Boghani
12-May-2010

A recent press release from unbiased.co.uk reports that UK retirement savers are missing out on an extra 742 million GBP in tax relief by not making additional pension contributions. The report suggests talking to an Independent Financial Advisor (IFA) about Additional Voluntary Contributions (AVC) plans.

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What is are Additional Voluntary Contributions?

AVCs run alongside employers' pension schemes and allow employees to pay extra into their pension, which should result in a larger pension pot at retirement. They are a cost-effective way to increase pension funds if a pension scheme has already been set up with your company.

As of April 2006, the option was available to make 'top up' payments from your current salary so that a larger sum will accumulate in retirement.  However to really understand their effect we have to consider what they are used to top up.

AVCs are used as extra contributions in defined benefit pension schemes (DB). DB pension members are entitled to a predefined percentage of their final salary at retirement. Now, if you happen to be an executive of a large company this final or your last level of salary will be large but for the average earner in a DB scheme it might not be sufficient for the future. So AVCs are a way of adding to your pension pot and having greater savings for the future.


Benefits of Additional Voluntary Contributions

*   lower administration charges in most cases than if you invested into a separate pension scheme
*   the opportunity to stop or vary the amount you pay
*   tax relief on your contributions (with accordance to the pension rules from April 2006)

Karen Barrett, Chief Executive of Unbiased.co.uk commented: "Failing to save for retirement has become an increasing problem for the UK population. The financial meltdown experienced over the last two years further compounded this problem, as the value of people's pension funds has decreased.

"And furthermore people have to put off saving for the retirement as their day-to-day money worries have taken priority. A discussion with an IFA is a good way to ensure you are planning effectively for your retirement and get your financial affairs in order."