Additional Voluntary Contributions (AVCs) are a way for NHS Pension Scheme members to save more for their retirement. They allow you to build a separate pension pot alongside your main NHS pension, giving you extra funds and flexibility when you stop working. These contributions are invested and managed by the scheme's official AVC provider.
What are Additional Voluntary Contributions (AVCs)?
Think of your main NHS pension as the foundation of your retirement income. It’s a ‘defined benefit’ scheme, which means the amount you get is based on a set formula involving your salary and years of service. It provides a secure, predictable income for life.
AVCs are different. They are a ‘defined contribution’ or ‘money purchase’ arrangement. This means you build up a personal pot of money. The amount you have at retirement depends on:
- How much you (and sometimes your employer, though not standard in the NHS AVC scheme) contribute.
- How well the investments in your pot perform over time.
- Any charges taken by the provider.
The NHS Pension Scheme has an approved provider for its AVC scheme. Historically this was Prudential, but you should always check the NHS Business Services Authority (NHSBSA) website for up-to-date information on the current provider. Your contributions are taken directly from your salary before tax is deducted, making it a tax-efficient way to save.
Your main NHS Pension: a quick recap
To understand why you might want to top up, it helps to be clear on what your main pension gives you. If you've been in the NHS for a while, you might have benefits in the older 1995 or 2008 sections, but since 1st April 2022, all active members build up pension in the 2015 Scheme.
The 2015 Scheme is a Career Average Revalued Earnings (CARE) scheme. For each year you work, you build up a pension worth 1/54th of your pensionable pay for that year. This amount is then increased every year until you retire to keep its value. While you're still working, it's revalued at the rate of the Consumer Prices Index (CPI) plus 1.5%. The Normal Pension Age in this scheme is the same as your State Pension age.
Your contributions are a percentage of your pay, and your employer contributes a significant amount too – currently 23.7% of your salary (though a portion of this is paid centrally to cover certain costs). This employer contribution is one of the most valuable benefits of the scheme.
Your own contribution rate depends on your pensionable earnings. The tiers are set to change from April 2025:
| Pensionable Earnings (from April 2025) | Contribution Rate |
|---|---|
| Up to £13,259 | 5.2% |
| £13,260 to £27,288 | 6.5% |
| £27,289 to £33,247 | 8.3% |
| £33,248 to £49,913 | 9.8% |
| £49,914 to £63,994 | 10.7% |
| £63,995 and over | 12.5% |
It's also worth being aware of the 'McCloud remedy'. If you were a member of a legacy scheme (1995/2008) before 2012 and were moved to the 2015 scheme, you will get to choose at retirement whether to take benefits from your old or the 2015 scheme for the period between 1 April 2015 and 31 March 2022.
Why might you consider an AVC?
Your main NHS pension is generous, so why pay in more? There are several good reasons why people choose to top up their savings with an AVC.
- To retire early: The 2015 scheme's pension age is linked to your State Pension age, which could be 67 or 68. An AVC pot could provide an income to bridge the gap if you want to stop working sooner.
- For a larger retirement income: Your NHS pension might not be enough to support the lifestyle you want in retirement. An AVC provides an extra stream of income.
- To get a bigger tax-free lump sum: While the 1995 section automatically includes a lump sum, the 2008 and 2015 schemes do not. You can give up some of your annual pension to create one. With an AVC, you can typically take up to 25% of the pot as a tax-free lump sum from age 55 (rising to 57), without affecting your main scheme pension.
- Flexibility: Unlike your main pension, which pays a set income for life, a DC pot from an AVC can be used in different ways. You could take it all as cash (though only 25% is tax-free), use it to buy a guaranteed income (an annuity), or leave it invested and draw down an income as needed.
- To make up for lost time: If you've had career breaks, worked part-time, or joined the NHS later in life, an AVC can help you catch up on your retirement savings.
A scenario: A Band 5 nurse saving extra
Let's imagine a Band 5 nurse, earning around £30,000 a year. They feel comfortable with their current budget and decide they want to put an extra £80 a month towards their retirement via the NHS AVC scheme.
Because the contribution is taken from their pre-tax salary, they get tax relief. As a basic rate (20%) taxpayer, for every £80 that goes out of their take-home pay, the government effectively adds £20. This means a total of £100 goes into their AVC pension pot.
So, the net cost to the nurse is £80, but their investment is £100. Over many years, this tax relief provides a significant boost to their savings. The final value of their pot will depend on how their chosen investments perform over the next 20 or 30 years, but they have given themselves a much better chance of having extra options at retirement.
If you're wondering how extra pension contributions might affect your monthly budget, you can model different scenarios using an NHS take-home pay calculator. This can help you find a contribution level that feels manageable.
What are the alternatives to AVCs?
AVCs are not the only way to boost your NHS pension. The scheme itself offers other options, and you can also save entirely separately.
Buy Additional Pension
This allows you to buy a specific amount of extra guaranteed annual pension, paid for life from your retirement date. You can buy it in units of £250 per year, up to a limit. You can pay for it with a one-off lump sum or through regular monthly deductions from your salary. This is a ‘defined benefit’ top-up, so unlike an AVC, the outcome is guaranteed and not subject to investment risk.
Early Retirement Reduction Buy-Out (ERRBO)
This is only available to members of the 2015 Scheme. It allows you to pay extra contributions to reduce or eliminate the financial penalty applied if you choose to claim your pension before your Normal Pension Age. You can buy out the reduction for a maximum of three years, meaning you could retire at 65 instead of 68 (for example) and receive a full, unreduced pension.
Personal Pensions and ISAs
You are also free to save entirely outside the NHS scheme. You could open a personal pension, such as a Self-Invested Personal Pension (SIPP), with a private provider. This gives you a very wide choice of investments, but you don't get the convenience of payments being taken from your salary.
A Stocks & Shares ISA is another popular option for long-term saving. You don't get tax relief on your contributions as you do with a pension, but any growth and all withdrawals are completely tax-free. This can be a very flexible partner to a pension.
Things to consider before you start
Deciding to start an AVC is a big financial step. Before you commit, it's vital to think about the following:
- Investment Risk: The value of your AVC pot is not guaranteed. It is invested in funds (like stocks and shares), and its value can fall as well as rise. You could get back less than you put in. This is the key difference from the defined benefit nature of your main NHS pension.
- Charges: The AVC provider will apply an annual management charge to your funds. While often competitive, these charges will reduce the overall growth of your investment over time. Make sure you understand what they are.
- Your Circumstances: Your age, financial goals, and attitude to risk are crucial. If you are close to retirement, you may have less time to ride out any downturns in the market. If you are risk-averse, buying a guaranteed Additional Pension might be more suitable.
- Seek Advice: Pensions are complex. While this article provides information, it is not financial advice. For a decision this important, it is highly recommended that you speak to an independent financial adviser who can look at your personal situation and help you make the best choice. Your union may be able to point you towards trusted advisers.
Key takeaways
- Additional Voluntary Contributions (AVCs) are a tax-efficient way to build a separate, personal pension pot alongside your main NHS pension.
- They are a ‘defined contribution’ investment, meaning the final value depends on contributions and investment performance, and is not guaranteed.
- Contributions are taken directly from your pre-tax salary and are managed by the scheme’s official provider, which you can find on the NHSBSA website.
- At retirement, your AVC pot offers flexibility – you can usually take 25% tax-free and use the rest to provide an income.
- There are alternatives, such as buying guaranteed Additional Pension within the main scheme or saving into a private pension or ISA.
- AVCs involve investment risk, so it is important to understand the charges and consider seeking independent financial advice before starting.