What are AVC’s?
Paying Additional Voluntary Contributions (AVC’s) is tax efficient way of saving more for your retirement by building your own fund to top up your IWCSSS benefits. Tax relief at your highest marginal rate will be added to your contributions, and investment returns are largely tax free.
How do AVC’s work?
Your normal contributions to the IWCSSS are a percentage of pensionable pay. With the contributions paid by your employer, these go towards the cost of paying your IWCSSS benefits. If the IWCSSS doesn’t have enough money to pay those benefits, then the employer has to make up the shortfall.
AVC’s work differently. There is no promised amount of benefit and there are no employer contributions. The AVC scheme operates on a ‘money purchase’ basis like personal pension or stakeholder plans. It’s probably easiest to think of it as a saving scheme from which you can withdraw money when your IWCSSS pension starts. You choose the amount you invest and you can stop making payments or change the amount you pay at any time. The AVC scheme is separate from the main scheme.
Where are my AVCs Invested?
If you decide to pay AVC’s they won’t be invested with your normal IWCSSS contributions. You will be able to choose where to invest them from some (though not all) of the very wide range of AVC funds available. Your AVC’s will buy ‘units’ in the fund you choose to invest in – effectively giving you a fund of your own. The value of your AVC fund when you retire will depend on how much you have paid in and the investment returns your contributions have earned.
Your choice of fund or funds (you can invest in more than one) is likely to be determined by the amount of investment risk you are prepared to take. Some operate on a similar basis to a conventional savings account in a bank or building society where you can’t lose any of the money you pay in but where the investment return (i.e. the rate of interest) is likely to be very modest.
Other funds invest in company shares (equities) where there is the potential for good long term growth but where returns are likely to vary sharply over time and there is no guarantee that you will get all your money back. The With-Profits Fund gives the prospect of a greater return than some funds but with less risk than direct exposure to equities by awarding guaranteed annual bonuses.
What happens when I retire?
The Proceeds of your AVC fund can be taken as a cash sum, or they can be used to buy an ‘annuity’ to top-up your IWCSSS pension, or you can take part as a cash sum and use the remainder to buy an annuity.
An annuity is a pension from an insurance company. The amount of pension you can buy with the part of your AVC fund you reserve for that purpose will depend on your age when you retire and prevailing annuity rates. Annuity rates are very sensitive to changes in interest rates and assumptions about lifespan. A combination of low interest rates and increased life expectancy has increased the costs of pensions – so people buying annuities now get less pension (£ for £) than they would have done some years ago.
Annuity rates also vary between insurance companies, who will provide their annuity terms. You will also have options about the type of annuity you want, for example whether you want it to increase in line with RPI and whether you want it to provide a pension for your spouse after death.
Further information about your AVC policy, including current fund values, the choices available, and the fund booklets, along with details of how to register for online access are available using the following web links:
Please contact the Scheme’s administration office if you have any questions.
IWCSSS, Hymans Robertson,
20 Waterloo Street,
Telephone 0141 566 7660 or Email firstname.lastname@example.org