Pension Planning - Occupational Salary Schemes

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Occupational Salary Schemes

Employers that offer an occupational scheme must also offer an in-house additional voluntary contribution (AVC) scheme.

Contributions to the scheme boost the pension and possibly other benefits you will get from the main occupational scheme. An in-house AVC scheme works in one of two ways:

• Added years scheme
  Your pension and other benefits depend on your earnings before retirement and the number of years you have been in the scheme. The AVC's are used to buy extra years, so you are credited with more years than you have really been a member for. These AVC's boost all the benefits that the main occupational scheme offers including the tax-free lump sum.
• Defined contribution schemes
  The AVC's are invested to build up a pension fund that is then used to buy extra pension and possibly other benefits. But they can't be used to create or increase the tax-free lump sum.

Instead of, or as well as, paying into the in-house AVC scheme, you can opt to pay into a free-standing (FSAVC) scheme. This is not organised by your employer, but a separate pension provider, which is usually an insurance company. All FSAVC schemes work on a defined contribution basis where your money builds up a fund that is used to buy extra pension and possibly other benefits.

But FSAVC's cannot be used to create or increase a tax-free lump sum. Unlike an in-house AVC scheme, an FSAVC scheme is not tied to a particular occupational scheme. When you change jobs, your FSAVC scheme stays with you and can be used to boost benefits from your new employer's scheme.