What is the difference between an AVC and FSAVC scheme?

The financial services sector is well known for acronyms and jargon, but we at Hilltop believe financial advice and guidance should be simple to understand. There are two acronyms you may have heard for pension schemes that make perfect sense once their benefits are spelt out: Additional Voluntary Contribution (AVC) and Free Standing Additional Voluntary Contribution (FSAVC) schemes. Read on to find out more about FSAVC and AVC schemes.

How do AVC and FSAVC schemes work?

AVC stands for ‘Additional Voluntary Contribution’, while FSAVC is an abbreviation of ‘Free Standing Additional Voluntary Contribution’. These acronym-heavy pension schemes allow members of workplace pension plans to build up extra pension benefits alongside their main workplace pension. Depending on the policy, additional contributions can be made to ‘buy’ everything from extra annual income to a tax-free lump sum or added years in an employer’s defined benefit pension scheme.

The difference between FSAVC and AVC schemes

Although FSAVC and AVC schemes are similar regarding what they offer, there is a subtle but important distinction. Let’s explore both types of voluntary contribution pension schemes to discover more about how they work, their advantages, and their major differences.

What is an AVC scheme?

An Additional Voluntary Contribution (AVC) scheme does exactly what it says on the tin: it enables you to make additional voluntary contributions over and above your workplace pension scheme. This type of voluntary contribution pension is typically a defined contribution pension, which means you decide how much you’d like to be deducted from your salary each month. These contributions are then invested to build up your pension pot.

Your pension pot’s final value will largely depend on the amount you contribute to your AVC scheme, the length of time those contributions remain invested, and the performance of those investments over time. You can usually begin taking money from your pension pot from the age of 55, either at the same time or after you start taking an income from your main workplace pension scheme (this will vary depending on your scheme’s rules). Generally, you can withdraw 25% of your pot tax-free, as long as you are withdrawing from your main pension as well. After that, AVCs are taxable beyond that initial tax-free threshold.

An AVC scheme can be particularly advantageous if you have a defined benefit pension, also known as a ‘final salary pension’. This is because an AVC can enable you to take out tax-free cash from that scheme rather than transferring and cashing in your defined benefit pension. The Financial Conduct Authority’s starting point with Defined Benefit pensions, is that they are best left where they are, but that isn’t always the best option for you. Other options include making additional contributions to access your pension earlier than usual without losing any value or making extra contributions to effectively purchase ‘added years’ in your employer’s defined benefit pension scheme.

What is an FSAVC Scheme?

A Free Standing Additional Voluntary Contribution (FSAVC) scheme also sits alongside your main workplace pension scheme, except the main difference being that an FSAVC scheme is set up by you rather than your employer and overseen by a pension provider. In all other aspects, FSAVC schemes are virtually identical to AVC schemes. You can also begin taking your money at age 55 with an initial 25% tax-free portion, and the value of your pension pot will depend on the same variables outlined above.

What happens to an AVC or FSAVC pension after death?

FSAVC and AVC schemes typically allow the pension saver to nominate a beneficiary after death. If you die before retirement age, the face value of your pension pot will usually be paid as a tax-free lump sum to your chosen beneficiary. If you didn’t stipulate a beneficiary, the trustees of your pension could award its value to any person deemed financially dependent on you at the time of your death.

Are AVCs and FSAVCs a good investment?

There is no hard and fast rule here. The benefit of taking out an FSAVC or AVC scheme will ultimately depend on your type of pension, associated charges, how and where your contributions are invested, and your unique retirement circumstances. However, the allure of building up extra benefits for retirement, greater flexibility over your contributions, additional tax relief, and the potential cost savings compared to setting up a private pension all add up to an enticing package of benefits should you choose to go down the route of an FSAVC or AVC scheme.

Hilltop Financial Planning: Pension Advisers

If you are a workplace pension scheme member but would like to make extra contributions in return for greater benefits, then FSAVC and AVC schemes offer an attractive option for boosting your retirement income. Before making any plans, it is worth discussing your options with one of our knowledgeable pension advisers to ensure you can make an informed decision that ultimately enables you to make the most of your pension pot.

If you would like more information about FSAVC and AVC schemes or to arrange a consultation, please contact us on 0161 413 7051. We are open 9am to 5pm Monday to Thursday and 9am to 4pm on Fridays. Hilltop Financial Planning is authorised and regulated by the Financial Conduct Authority. Our advisers have over 100 years of combined experience and knowledge of working with people like you and helping them to make the most of their finances.