PSI25.3.5 - Flexibility in Pension Provision – Flexible Use of AVCs- AVC Benefits Paid Early

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

Where the member chooses to take AVC benefits before the employer funded benefits come into payment, the AVC benefit must be paid as a pension (not as a lump sum, even where the avcs could be commuted in their own right, i.e. From pre 8 April 1987 AVC arrangements). When the member subsequently takes employer funded benefits, a lump sum may then be paid from the AVC fund, if it is a pre 8 April 1987 AVC arrangement.

Members of post 8 April 1987 AVC arrangements will, if scheme rules permit, be able to have their pension from their AVC fund included in the calculation of the maximum permissible lump sum payable from employer funded benefits ( see PSI8.1.5). Whereas the taking of benefits early would normally prevent a member from electing not to have continued rights (see PSI8.1.27) this restriction will not apply to an early AVC pension.

Where the payment of an AVC pension begins before employer funded benefits commence, the AVC pension must be paid in the form of income drawdown and not be secured by the purchase of an annuity. The reason for this requirement is that to allow annuity purchase at this stage would necessitate an additional surplus test (on top of the further test at the date employer funded benefits come into payment). This was deemed to be too much of an administrative burden especially bearing in mind that benefits have not crystallised and further contributions may still be made and for this reason and the fact that early payment of AVC benefits represent only a small proportion of the member's overall benefits, a decision was taken that AVC benefits being accessed early must be in the form of income drawdown.

When the employer funded benefits come into payment (and a maximum benefits limits check is made) any surplus avcs will be identified and repaid. The AVC pension may then be secured by annuity purchase or the member may decide to continue to receive income drawdown if the rules of the scheme contain adequate provision.