Tax treatment depends on your circumstances and is subject to change
If you work in the UK, are aged 22 or over and earn at least £10,000 per year, then your employer would have automatically enrolled you in a workplace pension. And any workplace pension you hold will typically have a minimum amount that you can pay in.
If you want to make additional contributions on top of your regular monthly payments, then it is possible to do so with an Additional Voluntary Contributions (AVC) pension. An AVC pension runs alongside your workplace pension and still allows you to receive tax relief on the contributions you make.
AVC pensions offer great flexibility when it comes to making your additional contributions. You can choose how much you contribute. This amount can go up and down depending on what you can afford and how much you would like to save. If you are lucky, your employer may offer a matched contributions scheme for AVCs, which will boost how much you’re able to save.
If the AVC pension scheme you hold is run by your employer, then your contributions will be taken out of your monthly pay before you receive it. Whereas, if you take one out privately then you will need to organise when and how much you will pay every month directly with the pension provider.
The option to join a public AVC pension is given to most public sector workers, such as teachers, NHS and local government employees. This is especially good if the AVC offered is a defined benefit scheme as this offers great security for your retirement income.
You can also take out a private AVC pension yourself. This can be a good idea if you’ve maxed out your allowance in other retirement savings or investments you may have.
If you have money left over from your salary each month and are looking to build a strong pension pot, then an AVC pension can be a good idea. This is especially true when compared to placing that extra cash in an ISA for example as you are likely to get more growth on money saved in a pension as well as receiving tax relief.
The biggest advantage to an AVC pension is the flexibility. You don’t have to commit to saving a set amount each month and instead can only contribute what you can afford to pay. And any contributions you do make will receive tax relief on top. This means that the government pays back the income tax you would have already paid on that money and places this straight into your pension.
As with any decision regarding your finances, there are a few things to consider. An AVC pension offered by your employer doesn’t offer as much flexibility as a private pension could. And, where this pension is connected to your workplace pension, the money held in it may be locked until you begin taking money from the main pension scheme.
Current government regulations allow you to start withdrawing your pensions at 55, and this includes taking your tax-free cash. If you have an AVC pension that is a defined contribution scheme, then you can withdraw your funds from the age of 55, even if you’re still working. However, if the scheme is a defined benefit pension, you will need to check the rules of your AVC as not all providers allow this.
If you are looking to withdraw money from your pension, the best thing to do is to speak with a regulated financial adviser. This is because all schemes are different and it’s important to know how your pension works and what options you have. Also, releasing pension money early isn’t right for everyone as it will leave you worse off in retirement. Therefore, a financial adviser can help you to decide what is right for you.
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
