Member Contributions
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It is quite normal for the pension scheme to require the
employee to contribute something towards the cost of providing the
pension. In most schemes the company will need to pay more
than the member to provide the promised level of benefits. Member
contributions are usually expressed as a percentage of salary and
can vary from nothing at all to 5% or 6%. However higher rates are
quite possible and increasingly more likely. Some schemes may even provide the option of paying different
contributions in return for a different level of pension.
To see exactly what your scheme provides and the level of
contributions required you should read the scheme booklet.
These are not the only contributions you can pay. If you are
interested in securing yourself additional pension then it may be
worthwhile considering the option of paying AVCs.
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Additional Voluntary Contributions (AVCs)
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Additional Voluntary Contributions (AVCs) are a way of
providing yourself with additional pension at retirement. AVCs are
just a mechanism to allow you to pay additional
contributions to gain additional pension at retirement. It is not
usual for companies to contribute anything towards AVCs they are
just something the company needs to make available for you to put
your own money in.
If an employer has a company pension scheme it must by law provide
members with the opportunity to pay Additional Voluntary
Contributions (AVCs). So what are AVCs?
AVCs can take two forms essentially
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The popular option is to provide a Money Purchase (another
name for DC) type pension scheme.
i.e. contributions are paid into a fund which is invested and
then used to buy a pension at retirement.
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A second and less widely available option sees the
additional contributions buying additional defined pension. So for
example an additional contribution of 10% of salary payable for
a year might buy an extra year of
service in a final salary scheme. (These are sometimes
called AVC added years).
If you have Money Purchase AVCs you may (not all schemes give
members a choice of investments) have the opportunity to decide
how these amounts should be invested. If so you should read the
investment guide. Insurance companies also provide AVC facilities called Free
Standing Additional Voluntary Contributions (FSAVCs). It is
generally considered better to use your own schemes in house AVC
facilities if they offer comparable facilities to the external
provider. However if you are at all unsure then we suggest you
obtain independent financial advice.
Other options exist for those
earning less than £30,000 a year including Personal Pensions and
Stakeholder Pensions. If in doubt please take independent
financial advice.
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