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 of the simplest and most tax-efficient ways to bridge the gap. They sit inside your existing employer scheme, attract full tax relief, and — in defined benefit schemes — can often be taken entirely as a tax-free lump sum at retirement. For public sector workers in particular, AVCs are frequently the best first option to explore before opening 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 administered by your employer’s pension scheme — not a separate provider — which makes them easy to set up and means contributions are usually taken directly from payroll.

AVCs sit in a separate pot from your main workplace pension — 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 tell your employer (usually via HR or the pension scheme administrator) 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 are made from net pay and tax relief is added by the pension provider (or you claim higher-rate relief via Self Assessment)
4. The money goes into an AVC fund of your choice — most schemes offer a range from cautious (cash, bonds) to growth-oriented (equities)
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 standard AVC offered by most workplace pension schemes. You contribute extra into the scheme’s own AVC arrangement, investing in funds provided by the scheme’s chosen AVC provider (commonly Prudential in public sector schemes).

These are the simplest to access and administer. The fund choice is limited to whatever the scheme offers, but charges are typically low — often 0.3–0.75% per year.

2. Shared Cost AVCs (SCAVCs)

A Shared Cost AVC is an enhanced version of the standard AVC, available in some public sector schemes (including the NHS Pension Scheme and many LGPS funds). The key difference is that the arrangement is 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 is the most cost-efficient AVC route where available. For a higher-rate taxpayer:

If your scheme offers Shared Cost AVCs, they are almost always preferable to standard AVCs. 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. They were popular before SIPPs existed as a flexible alternative.

FSAVCs are now rarely the best choice. A modern SIPP offers the same investment freedom, often lower charges, and more flexibility at retirement. The main residual use case is where someone already has an FSAVC from a previous employment that continues to run. For anyone starting fresh, a SIPP or in-house AVC is almost always preferable.

Tax Relief on AVCs

Tax relief is one of the primary reasons AVCs are so attractive. Every pound you contribute to an AVC is effectively subsidised by HMRC at your marginal tax rate. The effective cost of a £100 contribution:

Higher and additional-rate taxpayers who contribute via net pay or relief-at-source may need to claim the extra relief above basic rate through their Self Assessment tax return — it is not automatically applied. 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.

For members of defined contribution schemes, the annual allowance test is straightforward: total contributions in versus the £60,000 cap.

For members of defined benefit schemes, the annual allowance is measured differently. HMRC calculates a notional “pension input amount” based on the increase in your accrued DB benefits during the year — not the contributions paid. This is calculated as: (pension accrued at end of year × 16 — pension accrued at start of year × 16 — inflation adjustment), plus any AVC contributions. This can produce a large pension input amount for DB members even when AVC contributions are modest.

If your total pension input amount exceeds £60,000, you will be subject to an annual allowance charge. This is more commonly an issue for senior public sector workers with rapidly accruing defined benefit pensions — particularly NHS consultants and senior civil servants. If you are in a high-accrual DB scheme, check your pension input amount before increasing AVCs significantly.

If you have unused annual allowance from the previous three tax years, you can carry it forward to make a larger AVC contribution in a single year — 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?

This is where AVCs in defined benefit schemes offer a particularly valuable option. You generally have four choices for your AVC pot when you retire:

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

In most defined benefit schemes — NHS, LGPS, Teachers’, Civil Service — you can take your entire AVC pot as a tax-free lump sum at retirement, subject to two conditions:

• 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

In practice, most public sector workers have a main scheme lump sum that is well below 25% of their total pension value, leaving room to take the entire AVC pot as additional tax-free cash. This is one of the most compelling reasons to use AVCs in a DB scheme: you make contributions with full tax relief and receive the money back entirely 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 excess is taxable as income. 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

Use the AVC pot to purchase extra annual pension income from your scheme. This is the equivalent of buying an annuity inside the scheme. Rates vary — compare the scheme’s internal rate against the open market before committing.

3. Transfer to a SIPP or Personal Pension

Before taking benefits, transfer your AVC pot to a SIPP for more investment choice and greater withdrawal flexibility — including drawdown, UFPLS, or phased access. Not all schemes allow this, 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 at the fund level:

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) are almost certainly the better first option. 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. Many people use both — maximising the AVC tax-free lump sum advantage first, and using a SIPP for contributions beyond that.

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 and want to build a tax-free lump sum 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 gives you a much wider range of funds and asset classes
• You want full drawdown freedom at retirement without being constrained by scheme rules
• 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; if you are more than 10 years from retirement, a growth-oriented fund is typically appropriate; if you are within 5 years, consider whether to reduce risk
4. Complete the application — either online through the scheme portal or via an HR form; most schemes allow this to be done in minutes
5. Contributions start from your next pay date — check your first payslip to confirm the deduction is correct

You can usually change your AVC contribution level at any time through the same process. If your financial circumstances change, you can reduce contributions or stop them temporarily without any penalty — AVCs are entirely 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