20/08/2019
Paying Additional Voluntary Contributions. Is it Worth It?
There are two types of pension schemes if you wish to make additional voluntary contributions for your retirement. Many of our clients confuse these as they sound similar, but are actually fundamentally different. One generally gives you far better benefits than the other, and we will look at the reasons behind this, and if it was worth using one over the other.
The types of schemes are commonly referred to as AVC schemes and FSAVC schemes, short for “Additional Voluntary Contributions” & “Free-standing Additional Voluntary Contributions” respectively.
Both of these allow members of a workplace pension scheme to pay more into their retirement poi in order to have a larger pension.
The difference between AVC and FSAVC schemes
As we mentioned, the aim of both the AVC and FSAVC schemes is to allow members to squirrel away more funds for their retirement.
FSAVC schemes explained.
These policies are very similar to personal pensions. You pay your contributions into an investment fund managed by an insurance company and the final pension is determined by the performance of the assets in the fund (usually company shares).
FSAVC schemes are totally separate to your company pension scheme and you pay all the set-up and ongoing charges yourself.
Additional Voluntary Contributions explained
AVC schemes are part of your company pension scheme and come in two primary versions: Defined Benefit AVC and Defined Contribution AVC.
Defined Benefit AVC (also known as “Added Years”)
This type allows you to purchase extra months or years of scheme membership, if you have a “final salary” company pension scheme (like most schemes in the public sector). The additional years or months will add to your actual length of service, meaning higher retirement benefits.
Defined Contribution AVCs
These are very similar to the FSAVC, in that you pay monthly contributions into an investment fund. The major difference to FSAVCs though is that your company pension scheme will often pay the charges for you, meaning more of your money is available for investment.
So which scheme is best?
It is hard to generalise and say one is always better than another. Individual circumstances will dictate which is the most suitable for each person.
As a basic guide, however, if you are in a Public Sector pension scheme and you intend staying in it for some years, then you will likely benefit the most from buying “Added Years”.
Similarly, Defined Contribution AVCs tend to be better value than FSAVCs because your employer will subsidise the charges in the former, meaning over time more of your money will be invested leading to a larger retirement fund.
FSAVCs are very much the “poor relation” of both types of AVC scheme. If you were sold one, you should look into whether you were given the best and most suitable advice for you.
