Additional Voluntary Contributions (AVCs) Guide — Boost Your Pension

If your workplace pension is not going to give you enough income in retirement, Additional Voluntary Contributions (AVCs) are one way to add to your retirement income, with tax relief on the contributions. They sit inside your existing employer scheme, attract tax relief up to 100% of your earnings, and in some schemes part of the pot can be taken as a tax-free lump sum at retirement. For public sector workers in particular, it can be worth comparing the scheme’s AVCs with a separate SIPP.

This guide explains how AVCs work, what they cost after tax relief, the difference between the three types, when they make more sense than a SIPP, and the practical steps to start.

What Are AVCs?

Additional Voluntary Contributions are exactly what the name says: voluntary extra contributions you make into your workplace pension scheme, on top of your standard contributions. They are set up through your employer’s pension scheme (the scheme’s chosen AVC provider may run the fund), and contributions are usually taken directly from your pay.

In a defined benefit scheme, AVCs sit in a separate pot from your main pension, so they are not added directly to your defined benefit (final salary) accrual. Instead, they accumulate as an investment fund, similar in structure to a defined contribution pot. What you do with that pot at retirement depends on your scheme’s rules.

How AVCs Work in Practice

When you set up AVCs, the process is typically straightforward:

1. You contact your scheme (through HR or the scheme administrator, depending on the scheme) to set how much extra you want to contribute each month
2. If the scheme uses salary sacrifice, the contribution is taken from your gross pay before income tax and National Insurance are calculated — maximising the tax saving
3. If salary sacrifice is not available, contributions come out of your pay before Income Tax (a net pay arrangement), or from pay after tax with the pension provider adding basic-rate relief (relief at source), in which case you claim any higher-rate relief via Self Assessment
4. The money goes into an AVC fund of your choice from those your scheme’s provider offers
5. The fund grows free of income tax and capital gains tax
6. At retirement, you decide how to use the AVC pot alongside your main pension benefits

The investment risk is yours — unlike your main defined benefit pension, where the employer guarantees your income, your AVC pot rises and falls with the performance of the underlying funds you select.

The Three Types of AVC

1. In-House AVCs

The AVC arrangement linked to your employer’s scheme. You contribute extra into the scheme’s own AVC arrangement, investing in funds provided by the scheme’s chosen AVC provider.

These are the simplest to access and administer. The fund choice is limited to whatever the scheme offers, and charges depend on the provider and the fund.

2. Shared Cost AVCs (SCAVCs)

A Shared Cost AVC is an enhanced version of the standard AVC, available in some public sector schemes (for example, some LGPS funds where the employer offers it). The key difference is that the arrangement can be structured as salary sacrifice: your employer makes the contribution on your behalf, your gross salary is reduced by the equivalent amount, and both you and your employer save National Insurance.

This can be the cheaper AVC route where it is available, because of the National Insurance saving. For a higher-rate taxpayer:

If your scheme offers Shared Cost AVCs, they can cost you less than standard AVCs because of the National Insurance saving. Ask your HR department or pension scheme administrator whether they are available. Note that salary sacrifice can affect maternity/paternity pay and state benefit calculations based on your earnings: the salary sacrifice vs direct pension guide covers these considerations in detail.

3. Free-Standing AVCs (FSAVCs)

Free-Standing AVCs are an older product where you open an AVC arrangement with a provider of your own choosing, independent of your employer’s scheme.

FSAVCs are now rarely the best choice. A SIPP can offer a wider choice of investments, and charges differ between providers, so compare them with your existing FSAVC before moving. The main residual use case is where someone already has an FSAVC from a previous employment that continues to run.

Tax Relief on AVCs

Tax relief is one of the primary reasons AVCs are so attractive. Contributions to an AVC get tax relief at your marginal tax rate, on contributions worth up to 100% of your annual earnings. The effective cost of a £100 contribution:

Higher and additional-rate taxpayers who contribute under relief at source need to claim the extra relief above basic rate themselves, for example through Self Assessment, because it is not applied automatically. Under a net pay arrangement the employer takes the contribution before Income Tax, so the relief is applied through payroll. If your AVC contributions are made via salary sacrifice, all tax and NI relief is applied automatically through payroll. See our pension tax relief guide for the mechanics of each method.

AVCs and the Annual Allowance

All your pension contributions (regular workplace contributions, employer contributions and AVCs) count together toward the annual allowance, which is £60,000 in 2026/27 (it can be lower, for example if you have flexibly accessed your pension or have a high income).

For members of defined contribution schemes, the annual allowance test is simple: the total paid in by you and your employer against your annual allowance (£60,000 unless it is lower for you).

For members of defined benefit schemes, the annual allowance is measured differently. A notional “pension input amount” is worked out from the increase in the value of your accrued DB benefits during the year, not the contributions paid. The increase is the closing value (pension at the end of the year × 16, plus any separate lump sum) minus the opening value (pension at the start of the year × 16, plus any separate lump sum, increased by CPI inflation). Money purchase AVCs are counted separately, as the amount paid in. This can produce a large pension input amount for DB members even when AVC contributions are modest.

If your total pension savings are more than your annual allowance (after any carry forward), you will be subject to an annual allowance charge. This is more likely to be an issue where a defined benefit pension builds up quickly in a year. If you are in a high-accrual DB scheme, check your pension input amount before increasing AVCs significantly.

If you have used all of your annual allowance for the year, you may be able to carry forward unused allowance from the previous three tax years that you were in a registered pension scheme, to make a larger AVC contribution in a single year, which is useful for catching up or depositing a lump sum such as a bonus or inheritance.

High earners should also note: If your threshold income exceeds £200,000 and adjusted income exceeds £260,000, the tapered annual allowance reduces your allowance — potentially to as little as £10,000 for very high earners.

What Happens to Your AVC Pot at Retirement?

What you can do with an AVC pot depends on your scheme’s rules. The main options are:

1. Take It as a Tax-Free Lump Sum (DB Schemes)

In some defined benefit schemes, such as the LGPS, you can take your whole AVC pot as a tax-free lump sum at retirement, subject to two conditions (the NHS scheme, for example, allows up to 25% of the AVC fund value tax-free, so check your own scheme’s rules):

• The total tax-free cash you take (from both the main scheme and AVCs) must not exceed 25% of your total pension value (the capitalised value of your DB pension plus the AVC pot)
• The total must not exceed the Lump Sum Allowance of £268,275

Where a scheme allows the whole AVC pot to be taken tax-free, this can work if the main scheme lump sum leaves room under the 25% limit. In schemes that cap the tax-free part of the AVC pot (the NHS allows up to 25% of the AVC fund value), only that part comes back free of income tax.

Worked example:

• Defined benefit pension with a capitalised value of £500,000
• 25% tax-free cash entitlement: £125,000
• Main scheme lump sum taken: £80,000
• AVC pot: £45,000
• All £45,000 can be taken tax-free (total cash = £125,000, exactly 25%)

If your AVC pot would push the total above 25%, the part over that limit cannot be taken tax-free. See our guide to taking multiple pension lump sums and the pension tax-free lump sum guide for the full rules.

2. Buy Additional Pension Income

In some schemes you can use the AVC pot to buy extra pension from the scheme. This works a bit like buying an annuity inside the scheme. The amount you get depends on your age and health, so compare it with open market annuity rates before committing.

3. Transfer to a SIPP or Personal Pension

Before taking benefits, you may be able to transfer your AVC pot to a SIPP for more investment choice and greater withdrawal flexibility, including drawdown, UFPLS, or phased access. Conditions apply (in the LGPS, for example, you must have stopped paying AVCs), so check the rules first.

4. Purchase an Annuity on the Open Market

Use the AVC pot to buy an annuity from an insurer of your choice. Compare this against the drawdown vs annuity decision to determine which gives better long-term value for your circumstances.

AVCs by Public Sector Scheme

The AVC provider and shared cost availability varies by scheme. The table below shows the position for the main public sector schemes, but always verify with your own employer, as the specifics (particularly Shared Cost availability) can vary by employer:

For NHS-specific top-up options, see our NHS pension added years guide. For the LGPS in detail, see our LGPS guide.

AVCs vs a SIPP: Which Is Better?

AVCs and SIPPs offer the same headline tax relief, but differ in important ways. The right choice depends on your priorities:

The practical guidance: If you are in a defined benefit scheme and your primary goal is building a tax-free lump sum, AVCs (especially Shared Cost) may be worth considering first where the scheme allows the whole AVC pot to be taken tax-free. If you want maximum investment control, want to consolidate old pensions, or plan to use drawdown flexibly in retirement, a SIPP may serve you better. Some people use both.

Is an AVC Right for You?

AVCs make most sense if one or more of the following applies:

• You are in a public sector defined benefit scheme whose rules allow a tax-free lump sum from the AVC pot at retirement
• Your employer offers Shared Cost AVCs (salary sacrifice), making AVCs more tax-efficient than paying into a SIPP outside of payroll
• You want simplicity — contributions are handled automatically through payroll with no separate account to manage
• You want to catch up on missed contributions in previous low-earning years using carry forward
• You are approaching retirement and want a straightforward way to build a pot that can be taken as cash

AVCs are less ideal if:

• You want maximum investment flexibility: a SIPP usually lets you choose your own investments
• You want more choice over how you take your money at retirement than your scheme’s rules allow
• Your scheme’s AVC charges are high relative to a competitive SIPP
• You need to consolidate old pension pots — a SIPP is better designed for this

If you are unsure whether you are on track for retirement overall, see our pension contributions guide and Am I Saving Enough for Retirement? guide.

How to Start AVCs

Setting up AVCs is usually the simplest administrative task in pension planning:

1. Check what your scheme offers — contact your HR department or pension scheme administrator to find out which AVC options are available, whether Shared Cost is offered, and who the AVC provider is
2. Decide how much to contribute — consider your take-home pay, the annual allowance, and what you can sustain long-term
3. Choose your investment funds: your scheme will offer a selection; check each fund’s risk level and charges against when you plan to retire
4. Complete the application: through the route your scheme uses, such as an online portal or an HR form
5. Check your first payslip to confirm the deduction is correct, as the start date depends on your payroll

You can usually change your AVC contribution level at any time through the same process. If your financial circumstances change, you can usually reduce or stop contributions, though your pot will be smaller and charges still apply to what is already invested. AVCs are voluntary.

Related Guides

• Pension Tax Relief Guide UK
• Pension Annual Allowance Guide 2026/27
• Pension Carry Forward — How to Use Unused Allowances
• What Happens If You Exceed the Annual Allowance?
• Tapered Annual Allowance for High Earners
• Pension Contributions Guide — How Much Should You Save?
• Paying a Bonus Into Your Pension
• Salary Sacrifice vs Direct Pension Contributions
• Workplace Pension Guide UK
• NHS Pension Added Years Guide
• NHS Pension Guide
• LGPS — Local Government Pension Guide
• Teachers’ Pension Guide
• SIPP Guide UK — Self-Invested Personal Pension Explained
• Pension Tax-Free Lump Sum Guide
• Can I Take Multiple Pension Lump Sums?
• Drawdown vs Annuity — Which Is Right for You?
• Am I Saving Enough for Retirement?
• Pension Planning Hub