FOOL SCHOOL
Additional Voluntary Contributions

September 12, 2003

'AVCs' and 'FSAVCs' are an option for people who are members of an occupational scheme, but who don't think their benefits are going to be enough. AVC schemes are run by your employer. They enable people to top their pension contributions up to the maximum allowed. AVC stands for Additional Voluntary Contribution. In fact, if your employer offers an occupational pension, then it has to offer you an AVC if there's demand for it. There are also things called ' Free-Standing AVCs' or 'FSAVCs'. These are like a private version of an AVC and, if you're a member of an occupational scheme, then you can use one to top-up your contributions completely independently of your employer.

As you might imagine, an AVC (or FSAVC) for a defined contribution pension just increases your contributions, although they might be in a slightly different place from your main scheme. Where an AVC scheme is available for a defined benefit pension scheme (generally only in the public sector), your contributions can purchase 'added years'. In other words, you are buying extra years to be taken into account in calculating your final salary benefits.

An AVC, sponsored by your employer, has an advantage over an FSAVC because of 'economies of scale'. In other words, by grouping together with your fellow employees, the overall charges tend to be lower. FSAVCs are very similar to Personal Pensions. They also have many of the same drawbacks, in that they often charge too much and your fund can often be channelled into poorly performing investments. Some funds make an upfront charge every time you alter the amount you want to pay in. The bottom line on this is that, if you have an occupational pension scheme and want to increase your contributions, an in-house AVC scheme is likely to be a far more attractive option than an FSAVC.

Find out more in our pension centre.