Word of the Day
Free-standing Additional Voluntary Contributions
Similar to Additional Voluntary Contributions, which are top-up payments people make into their pension schemes to boost their eventual retirement income. If your employer does not contribute much into your company pension you may have to make AVCs to achieve anywhere near your hoped-for level of pension income. There are two types of AVC. You can either make extra payments into your company scheme or decide to contribute to another scheme managed by someone else. This latter AVC is called a Free-Standing AVC (FSAVC). There are pros and cons with both types of scheme. AVCs tend to be cheaper to make because administration costs are lower you're already in the pension scheme after all. But you put all your eggs in one basket and hope that the pension managers are good. An FSAVC may be slightly more expensive but at least you give another company a go at making your money grow. Whichever type of AVC you choose, the total contributions must not exceed 15% of your earnings in any tax year. You get tax relief on AVCs at your basic rate, as with other pension contributions. For example, for every £60 a 40% taxpayer contributes, £100 will actually go into the scheme, making a very tax-efficient way to save for the future. The only drawback is that the money you commit to your pension scheme is tied up until you retire, so don't leave yourself short in your zeal to make the most of the tax breaks!