Additional voluntary contributions
|Additional voluntary contributions|
Additional Voluntary Contribution (AVC) - is an additional allocation of funds, chosen by employee, to a retirement savings acccount that is above the amount of money that an employer will pay as a matching contribution. Employee can make AVC to a special tax-deferred savings accounts also known as individual retirement accounts.
The main features of AVCs are:
- tax-efficient - efficient way to increase retirement benefits,
- flexible - employee can save the amount he needs at a time that fits him,
- deducted - source from employee salary,
- variable - varying levels of investment risk depending on personal preference.
How much employee will collect from his AVC account at retirement depends on the:
- contributions made to AVC account,
- investment returns achieved,
- type of income employee will choose to take.
AVC gives employees a chance to add much more money to the tax-deferred accounts. Employer retirement plans usually indicate the percentage of employee salary that he or she will match near retirement. Employees can make additional payments to increase the account's value and increase the amount of money they will get every month after the retirement. AVCs might differ in tax treatment, but if they are made into a tax-deferred account, any returns cumulates tax-free up to retirement of employee.
There are two main versions of AVC schemes. First one is a defined contribution AVC scheme that gives a chance to pay additional contributions into the scheme. These contributions are invested, allowing employee to start collecting additional pension benefits from the age of the retirement. The value of these benefits will depend on how much money has been paid into the AVC, the length of time that each contribution has been invested and investment growth over this period. A defined benefit AVC (or added years AVC) allows you to buy additional months or years of membership in the employer’s defined benefit pension scheme. These added years then increase the pension benefits that you can receive at retirement through increasing the proportion of final pensionable earnings or career average revalued earnings. As an added years AVC is tied to the main employer’s scheme, benefits can only be taken from the AVC at the same time that benefits are taken from the main scheme.
Employee take up to 25% of the total value of a scheme benefits, including AVC account, as a tax-free cash lump sum (providing this is less than 25% of the Lifetime Allowance). Employee can use AVCs to take tax-free money before exchanging any Scheme benefits in order to maximise the amount of pension he or she would receive from the Scheme. Employee can also take up to 25% of your AVC account as tax-free cash and use the balance to buy an annuity. Alternatively, and may be able to take all of AVC account as a cash lump sum and 25% of this lump sum would be tax-free with the remainder taxed under the normal income tax rules. Generally, anyone with defined contribution savings has flexibility over how they can be used from the age of retirement subject to the rules of their pension scheme. To take advantage of these options employee may need to transfer his Scheme benefits as well as his AVC account into another scheme.
As the name suggests, a free-standing AVC (FSAVC) is not connected to the employer’s pension scheme. FSAVCs are offered by insurance companies and are defined contribution (money purchase) schemes. Following the pension reforms, AVCs and FSAVCs became less popular once it became possible to hold other types of pension, such as personal pensions and stakeholder pensions, as well as being a member of the employer’s workplace pension scheme. Added years AVCs can still offer valuable benefits, but the cost of purchasing each added year must be compared to other options.
- Grant P., A Straightforward Guide to Pensions and the Pensions Industry, Straightforward co. Ltd.,(2011)
- Government Printing Office, Social Security Programs Throughout the World: Asia and the Pacific', (2011),
- Laing S., Tax 2010 / 2011 For Dummies, John Wiley & Sons,(2010),
Author: Gabriel Krzywoń