Additional Voluntary Contributions (AVCs) Explained

Additional Voluntary Contributions (AVCs) are supplementary pension contributions made by employees who belong to a workplace pension scheme — most commonly a defined benefit (DB) scheme — but who want to save more than the scheme itself provides. For the right person in the right scheme, AVCs are a tax-efficient, low-cost way to boost retirement savings. For others, a SIPP or ISA may be more appropriate.

This guide cuts through the complexity. It explains how AVCs work, the key differences between in-house AVCs and free-standing AVCs (FSAVCs), how AVCs can be used to take additional tax-free cash at retirement, and how AVC contributions interact with annual allowance carry forward.

This article is correct as at June 2026 and is for general information only. It is not personal financial advice.

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What Are AVCs?

An AVC is a voluntary top-up contribution into a pension arrangement linked to your main workplace pension. If you are a member of an NHS, teachers, civil service, or private sector DB scheme — or a defined contribution (DC) workplace scheme — you can typically make AVCs alongside your standard pension contributions.

AVCs are:

• Paid from gross income (tax relief is applied at source or through payroll)
• Invested in a defined contribution pot (separate from your DB entitlement)
• Paid into either an in-house AVC scheme or a free-standing AVC (FSAVC)

They are not the same as pension contributions to a SIPP or personal pension, though they serve a similar function.

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In-House AVCs vs Free-Standing AVCs (FSAVCs)

In-House AVCs

These are offered by your employer as part of the main pension scheme arrangement. The AVC fund is held alongside the main scheme, administered by the scheme trustees, and invested through the scheme's AVC platform.

Advantages:

• Lower charges — employer-negotiated arrangements typically have lower annual management charges than retail products.
• Payroll integration — contributions deduct before take-home pay is calculated, so you save National Insurance as well as income tax (if contributions are made via salary sacrifice).
• Simplicity — investment options are curated and often include a default lifecycle strategy.

Disadvantages:

• Limited investment choice — you typically cannot invest in individual shares, ETFs, or alternative assets.
• Portability — in-house AVCs move with your main scheme and may not transfer cleanly if you change employer.

Free-Standing AVCs (FSAVCs)

An FSAVC is a separate personal pension taken out with an insurance company or pension provider, independent of your employer. It works identically to a personal pension but is specifically labelled as an AVC arrangement.

FSAVCs were popular in the 1980s and 1990s. Many were sold with inappropriate products and charges, and the FSAVC mis-selling review of the late 1990s led to widespread compensation. The Equitable Life collapse is a separate but related cautionary tale, affecting many AVC holders, including some NHS Pension Scheme members holding in-house AVCs with Equitable Life (see below).

Today, FSAVCs are rarely recommended because:

• Charges are higher than in-house schemes.
• No employer contribution is made into an FSAVC.
• A SIPP achieves the same flexibility at potentially lower cost with wider investment choice.

For most members, if you want to top up pension savings beyond the in-house AVC, a SIPP is the more rational choice.

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Using AVCs for Additional Tax-Free Cash (PCLS)

One of the most tax-efficient uses of an AVC fund is to use it to fund your Pension Commencement Lump Sum (PCLS) — the tax-free cash entitlement at retirement.

In many DB schemes (particularly public sector), the scheme's own PCLS requires you to commute (exchange) some of your annual pension income for cash — at a relatively modest commutation factor (often 12:1). However, if you have built up an AVC pot, many schemes allow you to take your entire AVC fund as PCLS, provided it does not exceed the maximum tax-free cash entitlement across all pensions.

This is highly valuable because:

1. You receive tax-free cash from the AVC pot without commuting any DB pension income.
2. Your full DB pension remains intact.
3. The AVC contributions attracted tax relief going in, and the payout is tax-free coming out — double tax efficiency.

Example: A member retires with a DB pension of £25,000 per year and an AVC pot of £60,000. If the scheme rules permit, and the maximum PCLS does not exceed the lump sum allowance (£268,275 in 2026/27 unless protected), the member can take the entire AVC as tax-free cash, preserving the full £25,000 pension.

Schemes vary in their rules on this. Always check with the scheme administrator whether AVC funds can be used in full for PCLS before retirement.

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The NHS AVC and the Equitable Life Legacy

The NHS Pension Scheme historically channelled members into in-house AVCs administered through Equitable Life Assurance Society. When Equitable Life closed to new business in 2000 and was subsequently found to have made unaffordable promises (particularly around guaranteed annuity rates, or GARs), NHS AVC holders were badly affected.

Compensation was eventually made available through the Equitable Life Payment Scheme, administered by HM Treasury, though many members received only partial recompense. Equitable Life's remaining book was transferred to Utmost Life (previously Reliance Life) over subsequent years.

NHS AVC providers are now primarily Prudential (now Utmost Life and Pensions/M&G), Equiniti, and Standard Life/Phoenix. NHS members who have in-house AVCs should:

• Check who currently administers their AVC pot.
• Review the charges and investment options on their current AVC platform.
• Obtain an up-to-date valuation.
• Consider whether consolidation into a SIPP — once they leave the NHS or approach retirement — is appropriate.

Importantly, NHS AVC holders wishing to use AVCs for PCLS top-up at retirement should confirm this option with their employer and the NHS Pensions Agency, as rules can differ between the 1995, 2008, and 2015 sections of the scheme.

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SIPP as an AVC Alternative

For many higher earners in DB schemes who want to supplement their main pension, a self-invested personal pension (SIPP) provides superior flexibility and investment choice compared to either in-house AVCs or FSAVCs:

Feature	In-House AVC	FSAVC	SIPP
Investment choice	Limited	Moderate	Very wide
Annual charges	Low	Higher	Varies (0.15–0.45% typical)
Employer contributions	Sometimes	No	Sometimes (if employer agrees)
Salary sacrifice	Yes (if scheme allows)	No	Sometimes
PCLS top-up use	Yes (scheme-permitting)	Yes	Yes (subject to rules)
Portability	Scheme-linked	Good	Excellent
Flexible drawdown	At transfer/retirement	At transfer/retirement	Yes, immediately from NMP age

The SIPP wins on flexibility and investment choice; in-house AVCs win on charges and ease of administration if you are an active scheme member. Many HNW savers run both: an in-house AVC to maximise the PCLS top-up at retirement, and a SIPP for the remainder of their supplementary saving.

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AVC Contributions and the Annual Allowance

AVC contributions count towards the annual allowance (AA) — £60,000 in 2026/27. For active DB scheme members, the total pension input includes:

1. The DB pension input amount (calculated as the increase in pension entitlement × 16, plus the increase in lump sum entitlement, over the pension input period).
2. AVC contributions paid in that tax year.

For most DB members on moderate salaries, the DB pension input amount alone consumes a significant portion of the annual allowance, leaving limited room for AVCs before the allowance is breached.

Tapered annual allowance further restricts contributions for those with adjusted income above £260,000. If your pension input (DB + AVC) exceeds your available allowance, an annual allowance charge applies.

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Carry Forward with AVCs

Carry forward allows members to use unused annual allowance from the preceding three tax years, provided they were a member of a registered pension scheme in each of those years.

AVCs paid in the current tax year are tested first against the current year's allowance. Any excess can be offset against carried-forward unused allowance.

For DB members, carry forward is most valuable when:

• A one-off bonus is available and you wish to make a large AVC contribution.
• You have had a period of low DB accrual (e.g. a career break, part-time work, or lower-paid years) and thus unused allowance.
• You are approaching retirement and want to maximise your AVC pot for PCLS purposes.

Carry forward requires careful calculation because the DB pension input for prior years must be established — which means obtaining annual benefit statements from the scheme for each relevant year. In-house AVC contributions in prior years are already on your statement; SIPP and FSAVC contributions from prior years will need to be confirmed separately.

Note: HMRC and your pension scheme do not automatically track carried-forward allowance. You must self-assess and record carry forward claims on your tax return. This is an area where a regulated adviser or tax professional adds real value.

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Practical Action Points

1. Review your in-house AVC platform — who administers it, what it charges, and what investment options are available.
2. Request an AVC illustration showing projected value at your planned retirement age.
3. Confirm the PCLS top-up rules with your scheme administrator — can your entire AVC fund be taken tax-free at retirement?
4. Model your annual allowance headroom — especially if you are a high earner subject to tapered rules.
5. Explore salary sacrifice — if your employer offers AVC contributions via salary sacrifice, you save both income tax and employee National Insurance (8% main rate, or 2% above the upper earnings limit), increasing the effective rate of tax relief substantially.
6. Consider a SIPP alongside — for flexibility, investment choice, and death benefit planning.

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How Global Investments Can Help

Global Investments advises high-earning employees, NHS and public sector professionals, and DB scheme members on optimal pension contribution strategies. Whether you need help modelling the PCLS top-up value of an AVC arrangement, calculating annual allowance headroom including carry forward, or deciding whether a SIPP better serves your supplementary saving needs, our regulated advisory partners provide thorough, independent analysis.

For clients in complex situations — tapered annual allowance, multiple pension arrangements, or large one-off contribution events — specialist advice pays for itself many times over.

This article is for general information only and does not constitute regulated financial advice. Tax treatment depends on individual circumstances and may change. Pension and tax rules are subject to government amendment. Always seek professional regulated advice before making pension contribution decisions.