Additional Voluntary Contributions (AVCs) and Free Standing Additional Voluntary Contributions (FSAVC)
A tax relief by means of contributing to an AVC or FSAVC might be just the thing to attract an employee to invest their money, either on a regular basis or in a large sum.
What are the differences between an AVC and an FSAVC?
With an AVC, contributions are placed in a pension scheme that is established by the employer. An FSAVC differs in the sense that contributions are directed through a policy with an insurance company that is selected by the employee or contributor.
This is only a basic summary. There are still two forms of additional voluntary contributions:
1) Money purchase AVC
This type of scheme is very simple, and not dissimilar to FSAVCs. The employee’s contributions go into a pot of money that is attached to the main employer’s scheme. It is then invested in the expectation that the accumulating ‘pot’ will grow in value.
2) Added year’s AVC (only applicable with final salary pension scheme)
Contributions to this type of scheme are not directed to an investment (as with their money purchase equivalent); instead the scheme will grant the employee extra year’s ‘credit’ within the main scheme. The higher the contributions (especially where these are regular), the higher the number of extra years granted.
Which is best: an FSAVC or one of the AVC types?
There is no correct answer to this question, but there is a very easy way to identify investors or the advisers who are least likely to select the best route to suit their needs and circumstances. The key thing to remember is that this isn’t a comparison of options, it’s simply finding the best fit.
FSAVCs are likely to incur a higher level of charges than a money purchase AVC, but the difference may not be so great as to always lead to a single best answer.
However, it is known that many ‘salesmen’ of FSAVCs have overlooked the need for a comparison between that FSAVC and an added year’s AVC without which the investor can’t possibly hope to choose the best option for his/her circumstances.
An added year’s AVC isn’t always better than an FSAVC, but if a comparison hasn’t been made before and up to the ‘point of sale’ it is time to contact United Claims Management for any pension mis selling claims.