FSAVC schemes

A pension plan where the scheme member can make extra contributions that are separate from the occupational pension scheme is called a free standing additional voluntary contribution (FSAVC) scheme. The FSAVC contributions are free standing in that they will be made to a life assurance company through adefined contribution scheme. 

Since 6 April 2006 HM Revenue & Customs maximum contributions to occupational pension have changed. The rules allow an employee to contribute either £3,600 per annum or 100% of their earnings in order to benefit from tax relief at their marginal rate of tax. 

The maximum Annual Allowance will increase in each subsequent year from the 2006/07 tax year of £215,000. This contribution ceiling will rise by £10,000 per annum to £255,000 by 2010/11 tax year. The annual allowance ceiling represents the combined amount that an employee and their employer can contribute to pensions during the year without a tax penalty. If the scheme member exceeds the HM Revenue & Customs limit of £235,000 for the 2008/09 tax year, there will be an annual allowance charge applied of 40% under self-assessment on any excess contribution.

Previous to A-Day the maximum contribution was limited to 15.0% of taxable earning. The scheme member of a free standing additional contribution scheme with contributions of more than £2,400 gross per annum would have required a headroom checkand at this time there was no opportunity for the scheme member to commute part of the fund value to a tax free lump sum.

The income from an FSAVC is based on the contributions made by the member, investment return and the pension fund value must be used to buy pension annuities at retirement. When making an annuity purchase the individual has the option to search for the highest annuity rates using an open market option, however, learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quoteoffering guaranteed rates.

Since A-Day, the Pension Simplification rules introduced from 6 April 2006 allow a tax free lump sum of 25% to be taken from an FSAVC or AVC. Previous to A-Day, there was no possibility for commutation to a tax free lump sum with an AVC and the whole of the fund value must purchase a compulsory purchase annuityproviding a pension income at retirement age. 

With Pensions Simplification, for those employees that are members of their occupational pension scheme, multiple pension scheme membership will allow them to contribute to as many pension scheme types as their personal circumstances require with the only restriction being the annual allowance and lifetime allowance.


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