AVC and FSAVC Pensions in plain English

What are AVC and FSAVC pensions? At Profile Pensions we like to keep things simple. We try to avoid jargon and speak in plain English. Which is a challenge when we have to deal with acronyms like FSAVC. But OK, here’s our shot. 

AVCs: Additional Voluntary Contributions

AVC is an abbreviation of “Additional Voluntary Contributions”, they’re set up alongside a workplace scheme. Let’s see how this works. All workers meeting the criteria are entitled to a workplace pension, where both employer and employee pay monthly contributions into a pension scheme chosen by the employer. If the employee wants to save a bit more, he can voluntarily contribute an additional amount each month. These contributions are AVCs. They can be linked to both defined contributions (DC) and defined benefits (DB) schemes.

They’re designed to boost your overall pension pot (and well done you, if you are doing that). Some AVC schemes are administered by your employer, always as an additional benefit alongside the mandatory workplace scheme, but in other cases you can set one up autonomously. Applying through your employer, AVCs will be deducted from your salary along with the contributions that you already pay in the company pension scheme.

And here’s the confusing bit: your standard workplace contributions and AVCs may end u in different pots depending on the arrangements that your employer has in place.

Unfortunately, here we can’t be too specific because individual circumstances can change a lot. When it comes to pension contributions, some industries can be very generous while others may only offer the bare minimum. Like other defined contribution pensions (DC schemes), with AVC plans the devil is in the details and it’s important to ask the right questions: who is my pension provider? In which pension fund are my contributions invested? What charges am I paying? Your HR manager should be able to answer. Alternatively, check the documents that you have received starting the new job and find the pension policy. That should contain all the details you need.

What you need to know on AVCs

For starters, AVC pensions are defined contribution pensions (abbreviated in DC pensions). This means that you decide how much you want to put in it every month. You can take money out after you reach 55 years old (57 from 2028): as a general rule, you can withdraw 25% of your pot as a tax-free lump sum, but only if you’re withdrawing from the main pension scheme as well. Again, individual cases may differ greatly, for example it may be possible to take the whole pot tax free depending on the size of the main scheme.

You have other options too:

• you can exchange your AVC fund for an annuity;

• you can withdraw cash at different times (and always if you’re withdrawing from the main scheme too or you just have), keeping in mind that amounts over the starting 25% lump will be taxed as income for the year, depending on your specific case (yes, we’re saying this a lot).

Free Standing Additional Voluntary Contributions

FSAVC stands for ‘Free Standing Additional Voluntary Contribution Plan’.

The Additional Voluntary Contribution (AVC) bit means it’s an additional contribution above your standard workplace pension contribution. The “Free Standing” bit means that it’s not run by your employer and it’s managed by a provider of your choice. FSAVCs are picked and controlled by you.

What happens to AVC pensions after death?

With AVC and FSAVC you can nominate a beneficiary, who will receive the money in the unfortunate event of your death (more details here).

Again, if you don’t have an employee pension scheme in place already, you’ll find little value in this type of pension. A workplace scheme should come first before you look at any other AVC schemes. And if you want to start there we’re happy to help you choose a private pension plan. 

Oh, and if you're not sure what sort of AVC you have (FSAVC or employer AVC) that’s fine. We get calls daily from people asking which one they have. We'll be happy to tell you. And even though we don’t deal in AVCs we can tell you where to go next for advice.

Capital at risk. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.