Educational, not advice. This guide explains how Additional Voluntary Contributions work in public sector schemes. It is general information, not personal financial advice. AVCs carry investment risk and the right answer depends on your circumstances, so consider regulated advice before committing.
In short
- An AVC is a separate investment pot you build alongside your main pension. Its value can go up or down.
- That makes it the opposite of added pension, which buys guaranteed income. AVCs trade certainty for flexibility.
- The standout feature is in the LGPS: taken alongside your main pension, you can usually take up to 100% of your AVC pot as tax-free cash, within the overall limits.
- A Shared Cost AVC uses salary sacrifice, so you save National Insurance as well as income tax. For LGPS members it is often the best-value route.
- You get tax relief going in, but you carry the investment risk, and tax-free cash is capped by the Lump Sum Allowance of £268,275 across all your pensions.
What an AVC is
An Additional Voluntary Contribution is money you choose to pay into a separate, invested pot run by your scheme’s AVC provider. Unlike your main pension, which pays a guaranteed income, an AVC is a defined contribution arrangement: you build a pot, it is invested, and its eventual value depends on contributions, charges and investment returns. You get tax relief on what you pay in, just like your normal contributions.
This is the key difference from buying added pension, which buys a fixed amount of guaranteed, inflation-linked income. An AVC gives you a flexible pot instead. Neither is better in the abstract; they do different jobs. For the wider context, see how UK public sector pensions actually work.
The LGPS tax-free cash advantage
This is where AVCs get genuinely interesting for local government members. If you take your AVC pot at the same time as your main LGPS benefits, you can usually take up to 100% of the AVC pot as tax-free cash, provided your total tax-free lump sum (the AVC pot plus any LGPS lump sum) stays within 25% of the overall value of your benefits, and within the Lump Sum Allowance.
That is unusually generous. In effect, you can pay money into the AVC with tax relief and, in the right circumstances, take the whole lot back out tax-free. It is why an LGPS AVC, used in the years approaching retirement, can be one of the most tax-efficient savings moves available to a public sector worker. The overall cap to keep in mind is the Lump Sum Allowance of £268,275 across all your pensions; tax-free cash above that is lost.
Shared Cost AVCs: the National Insurance saving
Many LGPS employers offer a Shared Cost AVC, where contributions are made through salary sacrifice. Because the money comes out of pay before both tax and National Insurance, you save National Insurance as well as income tax on what you pay in, which an ordinary AVC does not. For eligible LGPS members this is often the best-value way to run an AVC, and it is worth asking your employer whether a Shared Cost arrangement is available.
AVCs in the NHS, Teachers’ and other schemes
The NHS, Teachers’ and other schemes also offer money purchase AVCs, run through nominated providers. They work on the same investment-pot basis and attract tax relief, and you can normally take 25% of the pot as tax-free cash and use the rest for retirement income. What they generally do not offer is the LGPS feature of taking the entire AVC pot as tax-free cash, so the headline attraction is strongest in local government. Check your own scheme’s AVC terms, because the providers, fund choices and charges vary.
The risks and the catches
- Investment risk. The pot can fall as well as rise, especially close to retirement. Your main scheme pension carries no such risk; an AVC does.
- Charges matter. Provider and fund charges eat into returns over time, so it is worth knowing what you are paying.
- The allowances. AVCs count towards the annual allowance, and tax-free cash is capped by the Lump Sum Allowance. High earners and large pots should check both.
- Timing. The LGPS tax-free cash advantage depends on taking the AVC alongside your main benefits, so the timing of how you retire matters.
Common questions
What is the difference between an AVC and added pension?
Added pension buys a guaranteed, inflation-linked amount of extra income. An AVC builds a separate investment pot with no guarantee. AVCs offer flexibility and, in the LGPS, generous tax-free cash; added pension offers certainty.
Can I really take my whole LGPS AVC pot tax-free?
Often, yes, if you take it at the same time as your main LGPS benefits and stay within the 25% and Lump Sum Allowance limits. This is the feature that makes LGPS AVCs so attractive.
What is a Shared Cost AVC?
An AVC paid through salary sacrifice, so you save National Insurance as well as income tax on contributions. Where your LGPS employer offers it, it is usually the most cost-effective way to run an AVC.
Pension Plain’s take
For LGPS members, AVCs deserve a serious look, especially a Shared Cost AVC in the years before retirement, because the combination of tax relief going in, National Insurance savings, and up to 100% tax-free cash coming out is genuinely powerful. For members of other schemes the case is milder: an AVC is a flexible, tax-relieved top-up, but without the local government cash advantage. In every scheme the trade-off is the same: you swap the certainty of your main pension for the flexibility and risk of an investment pot. Know your charges, mind the allowances, and if the sums are large, take regulated advice.
This article is for general information and does not constitute financial advice. AVCs involve investment risk and scheme terms vary. Consider speaking to a regulated adviser before making decisions.