Should you pay more into your company scheme or make separate arrangements?

For decades the only way members of a company scheme could top up their pensions was by making additional voluntary contributions (AVCs).

But this is no longer the case and personal pensions or self-invested personal pensions (SIPPs) can be used instead. However, it is not always in an employee's interest to reject AVCs in favour of a personal pension plan. The flexibility to take tax-free cash, for example, means that AVCs are more important than ever for members of final-salary schemes.

For people with defined contribution pensions, the benefits are less clear. Switching to a personal pension or SIPP could give access to a far greater range of investment opportunities, but there are benefits for those in final-salary schemes who opt to save through AVCs.

Until this year it was generally not possible to take tax-free cash from AVCs, which are vehicles for paying sums into your pension above any compulsory contributions you are required to make to your company scheme.

AVCs can be used to buy extra years in final-salary pensions or can stand alongside defined contribution funds in money purchase occupational schemes.
Free-standing AVCs (FSAVCs) are like in-house AVCs but held independently through an external pension company.

Under the new rules, people with AVCs can take 25 per cent of the full value of their final-salary scheme out of their AVC pot, meaning they get a fair value for their tax-free cash, provided the scheme's trustees allow it.

Some schemes may not have changed their rules to allow you to do this, but they will have to do so by 2011.

For example, someone offered a £50,000 lump sum for trading in £5,000 of annual pension income could instead be able to draw more than £100,000 free of tax from a well-funded AVC pot.

The new pension rules mean that saving alongside your occupational scheme is easier than ever, but for people who have defined-contribution pensions the benefits of staying with AVCs are less clear.

If you require any further information, please email or contact us.