Most people know they can top up their pension. But did you know there's a way to do it that costs you less than you'd expect? It's called a Shared Cost AVC, and if you're in the LGPS, the way it's structured means more ends up in your pension pot than you actually pay in.
An Additional Voluntary Contribution (AVC) is extra money you choose to pay into a pension pot on top of your standard LGPS contributions. It builds up separately from your main pension, is invested until you retire and gives you more to draw on when you do.
Standard AVCs are a reasonable option. But a Shared Cost AVC is a more efficient version of the same idea, and the difference comes down to one thing: when your contributions are taken.
New to the LGPS? Our complete guide to the Local Government Pension Scheme covers the basics before you dive in here.
With a Standard AVC, contributions come out before Income Tax, so you save on tax, but National Insurance is still calculated on your full salary. With a Shared Cost AVC, contributions come out before both Income Tax and National Insurance are calculated. So you get relief on both, not just one.
Meet Niall. He earns £30,000 a year and wants £100 a month going into his Shared Cost AVC. As a basic-rate taxpayer, he gets 20% Income Tax relief, so for every £100 he contributes from his take-home pay, the government effectively adds £25. On top of that, because contributions come out before National Insurance is calculated, he saves a further £13.75 in NI. Total landing in his pot each month: £138.75.
Even small contributions like that can grow significantly over time, thanks to compound growth.
Higher-rate taxpayers can potentially benefit from 40% Income Tax and 2% National Insurance savings.
One practical note: because your salary is reduced through sacrifice, it can't fall below the National Minimum Wage. If you're on a lower salary, your HR or payroll team can tell you how much headroom you have. The minimum contribution is just £2 a month and you can stop or adjust at any time.
A heads-up on NI rules: from 2029, National Insurance savings through salary sacrifice will potentially be capped on the first £2,000 contributed per year. Anything above that will be subject to National Insurance. The next few years are a great opportunity to get ahead and make the most of these savings before the rules potentially change.
You can access your pot from age 55. It's generally best to take your Shared Cost AVC at the same time as your main LGPS pension as this is usually the only way to access the full amount as tax-free cash (limits apply).
You can choose to take it separately, but different rules apply: you'll usually need to transfer your Shared Cost AVC to another registered pension scheme provider before accessing it. Once transferred, it can usually be taken as an annuity, through drawdown or flexible drawdown, depending on the provider’s rules. Members in Scotland don’t need to transfer to access their AVC separately.
When it comes to taking your pension money, you’ve got a few different options, and you can usually combine them too.
1. Take 25% tax-free
You can take up to 25% of your pension as a tax-free lump sum. For example, if you’ve saved £40,000, you could take £10,000 with no tax owed. You can take the full amount tax-free if it’s linked to your LGPS (limits apply).
2. Buy an annuity
An annuity gives you a guaranteed regular income for life or for a fixed period. How much you get depends on things like your age, health, market conditions and the type of annuity you choose.
3. Use drawdown
Your money stays invested, and you take out income as and when you need it. This gives you flexibility, but your pension value can go down as well as up.
4. Take the whole pot as cash
You can withdraw everything at once if you want. But anything above the 25% tax-free portion is taxed as income, which could push you into a higher tax band, so this is rarely the most tax-efficient option unless your pension pot is relatively small.
5. Mix and match
You don’t have to choose just one option. Many people combine approaches to suit their needs and retirement plans.
Shared Cost AVCs are exclusive to members of the LGPS. If you're employed by one of My Money Matters' partner organisations and paying into the LGPS, you'll usually be eligible. Not sure? Check your pension paperwork, log into your employee benefits portal or speak to your HR team.
Because contributions are made through salary sacrifice, your pay can't fall below the National Minimum Wage after they're taken. If your salary is low, you may not be able to contribute, or only by a small amount. Your payroll or HR team can confirm what's possible.
Shared Cost AVCs are a long-term commitment, so it’s worth considering your wider financial commitments before starting or increasing contributions. Pension savings are usually locked away until at least age 55, so some members may prefer to balance pension saving with accessible savings and other financial priorities. Starting small and increasing contributions over time can help make contributions more manageable.