An ‘additional voluntary contribution’ pension, commonly known as an AVC pension, allows you to make extra contributions to your workplace pension scheme.

Contributing to an AVC pension can be a good way of boosting your workplace pension if, for example, you have some spare cash that you would like to save towards your retirement, or you’ve put off saving into your pension and want to make up for lost time.

Here, we’ll explain how AVC pensions work and when you might consider contributing to one.

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How does an AVC pension work?

If you have a workplace pension scheme, your employer may also have set up an AVC pension. You can choose to pay into the AVC pension in addition to your workplace pension scheme. If your employer doesn’t offer an AVC pension, you can still pay into one separately with a pension provider (known as a free-standing additional voluntary contribution, or FSAVC). This effectively means that you have a pension fund that’s separate from your workplace pension that you can pay as much or as little of your salary into as you like (within certain limits).

There are two main types of AVC pension:

  • If you have a defined contribution workplace pension, then you may be offered a defined contribution AVC by your employer. With this type of pension, the value of your pension will depend on the amount that you and your employer contribute, and your investment returns. As with a standard defined contribution pension, you can access a defined contribution AVC pension from the age of 55 (rising to 57 in 2028). You can take a tax-free cash lump sum of up to 25% from your pension, and do as you wish with the remainder of your retirement savings. You may, for example, choose to remain invested in a drawdown plan, or use some/all of your money to buy an annuity to provide a guaranteed income in retirement. Read more in our article Your pension options at retirement

If you set up a free-standing additional voluntary contribution, or FSAVC, you must make contributions directly into the pension yourself, rather than having these automatically deducted from your salary. 

  • If you have a defined benefit or ‘final salary’ workplace pension, you can save into a defined benefit AVC. Defined benefit schemes are considered the gold standard of pensions, as they pay out a guaranteed retirement income based on your salary and the number of years spent working for your employer. If you pay into a defined benefit AVC, you effectively buy extra years (as if you had been working for your employer for a longer period), meaning you will be entitled to increased pension benefits when you retire. Defined benefit AVC pensions are only ever attached to workplace pensions, meaning you can’t take one out independently.

Your contributions to an AVC pension will also benefit from pension tax relief. That means that for every contribution you make, the government gives back the amount you would have paid in income tax. Basic rate taxpayers receive 20% pension tax relief, so if you wanted to add £100 to an AVC pension, for instance, you’d only need to contribute £80 yourself, and would get the remaining £20 in pension tax relief.

You should be able to transfer your AVC pension to a new employer if they have an AVC scheme as well.

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If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified local advisor give an unbiased assessment of your retirement savings.

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How much can I pay into an AVC pension?

Defined contribution AVC pensions are subject to the usual pension contribution rules, meaning you can pay in as much as you like as long as you don’t exceed your Annual Allowance. In the 2023/24 tax year, the Annual Allowance is £60,000, though you can carry forward any Annual Allowance from the previous three years that went unused using the pension ‘carry forward rule’.

Read more about pension allowances in our article How do pension allowances work? and Pension carry forward explained.

What are the advantages and disadvantages of an AVC pension?

If your workplace offers one, an AVC pension can be a great way of increasing your pension savings in preparation for retirement. Workplace pension schemes are set up by your employer, so you don’t have to set up and manage the pension yourself, and they may be cheaper than a private pension.

AVC pensions also tend to be quite flexible, allowing you to increase, decrease or pause your contributions at any time. You can make a lump sum payment into an AVC pension, for example, or set it up to take a regular amount from your salary instead. This way, if your financial circumstances change suddenly or a large expense crops up, you can adjust your contributions to reflect this.

As we’ve mentioned, your contributions will also benefit from pension tax relief, which effectively means that your income will be of greater value when placed into an AVC pension than if taken directly.

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If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified local advisor give an unbiased assessment of your retirement savings.

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One disadvantage of AVC pensions is that the choice of investment funds is sometimes quite limited. Whereas most regular workplace pension schemes tend to offer a variety of possible funds at various levels of risk, an AVC pension may only offer two or three fairly conservative funds.

If this is a point of concern for you, you could consider setting up a personal pension (also known as a private pension) instead. These tend to offer a greater choice of investments, particularly if you opt for a self-invested personal pension (SIPP). You could benefit from higher returns, and also have the freedom to choose your pension provider this way, rather than having to go for the one your workplace has selected. So, if you want to top up your workplace pension scheme but have reservations about contributing to an AVC pension, a personal pension could be the route to take – though bear in mind that you’ll have to pay the fees to set it up.

Should I get an AVC pension?

If your workplace offers an AVC pension scheme in addition to your regular workplace pension, it could be worth considering, provided you have enough money to make contributions.

If you want to get a better idea of how much your pension could provide at retirement, you can use the Rest Less pension calculator to estimate what your pension pot could be worth, and how long it will last in retirement. If you’re on a defined benefit scheme, it should be fairly simple to find out how much you’ll receive in retirement – contact your workplace or pension provider if you’re unsure.

If you are still unsure about whether an AVC pension would be a good idea, or you want to get tailored advice that’s specific to your personal circumstances, it could be worth seeking advice from a professional financial advisor.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

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