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Frequently asked questions 

  • I see that the ‘annual allowance is being lowered from £255,000 to £50,000 … what is the annual allowance all about?

    The annual allowance is a measure of an individual’s pension saving in any particular year, and the Revenue specifies the way in which it is measured.  The annual allowance is measured over a ‘pension input period’ (PIP) which, for USS members, runs from 1 April to 31 March.  The annual allowance is established by calculating the value of an individual’s benefits at the start and at the end of the pension input period, and the difference between these two values – taking into account an allowance for inflation – is used to calculate the annual allowance value applying a standard multiplying factor provided by the Revenue.  The product of this calculation is called the ‘pension input amount’ for the year. 

    Examples of the annual allowance calculation are available on the Revenue’s website at the following link:
    http://www.hmrc.gov.uk/pensionschemes/annual-allowance/guide.htm

    A modeller to illustrate whether you are likely to be affected is available at:
    http://www.uss.co.uk/SchemeGuide/FinalSalaryBenefitssection/modellersandcalculators/annualallowancemodeller/Pages/default.aspx

    I also pay added years and money purchase contributions, how are they taken into account in the annual allowance calculation?

    Added years contributions form part of your main scheme benefits and therefore when the value of the accrual over the course of a PIP is calculated, the additional service is included in the calculation which would have been credited if you had left your employment at the end of the PIP. Contributions to the money purchase fund are much simpler as it is the amount paid that is measured, for instance, if you contribute £10,000 to the money purchase section, then you will have used £10,000 for that year. That amount will also be a 'pension input amount' for the year. The PIP is 1 April to 31 March for money purchase benefits under USS as for all others.
  • I also pay added years and money purchase contributions, how are they taken into account in the annual allowance calculation?
    Added years contributions form part of your main scheme benefits and therefore when the value of the accrual over the course of a PIP is calculated, the additional service is included in the calculation which would have been credited if you had left your employment at the end of the PIP.  Contributions to the money purchase fund are much simpler as it is the amount paid that is measured, for instance, if you contribute £10,000 to the money purchase section, then you will have used £10,000 for that year.  And that amount will also be a ‘pension input amount’ for the year.  The PIP is 1 April to 31 March for money purchase benefits under USS as for all others.
  • What happens if the pension benefits that you earn in any scheme year exceed the annual allowance?
    A tax charge will be levied on the amount of pension saving which is above the level of the annual allowance, with tax applying at the individual’s marginal rate.  So, for example, if a member has £70,000 of pension input amount in a particular year, the amount of that saving minus the annual allowance eg £70,000 - £50,000 = £20,000, would be subject to the annual allowance charge.  If the member is a 40% tax payer, the tax charge would be £20,000 x 40% = £8,000.  However, this is not the full story … a person may use unused allowance from the three previous years to reduce the tax liability in the current year, and these ‘carry forward’ arrangements will be extremely useful in reducing or eliminating the tax charge for all but the very highest earners.  Whether allowance for years before 2011/12 is “unused” will be calculated as if the new arrangements had been in force from the tax year 2008/09.  It is worth stating that the level of the annual allowance may change in the future although it is not clear how government will do this in the future, if indeed at all.
     
    If you anticipate you might get a tax charge there are some options for how you might mitigate/avoid a charge. For more information see the 'Limits to tax relief and tax-free benefits' factsheet and its addendum.
  • How will the Revenue determine and collect the tax charge?
    The tax charge will be determined through the self-assessment process.  A member completing his/her tax return will be asked to provide certain information about their pension saving, and in turn pension schemes and employers will be required by law to provide this information – contained within what will be known as a “pension saving statement” – to affected scheme members.  Strict time limits  have been set for employers to provide the relevant information to pension schemes, and in turn for pension schemes to provide the relevant information to the affected members in order that they can include the information on their tax self-assessment forms.
  • Are there any other ways to meet the tax liability once it falls due?
    Yes, it is possible for members to elect for USS to pay the tax on their behalf, with the scheme applying an appropriate reduction to the individual’s benefits as a result.  The regulations require that the adjustment to benefits is applied on a “just and reasonable” basis, and the trustee company will confirm to members what the effect is on benefits of the scheme paying the tax charge.  This system for paying the tax due is referred to as “scheme pays”, and a member can only choose this when the amount of the tax charge is greater than £2,000.  A member can elect for the whole charge to be paid by USS on their behalf or decide to meet a portion of it with USS covering the remainder, provided in either case that his/her total pension input amount in relation to USS exceeded £50,000 for the year. To see some example rates of pension reductions under scheme pays click here.
  • How can I find out what level of annual allowance I am likely to accrue in any particular year?
    There is a modeller available on the USS website at (a link is to the modeller is given below) which will allow you to estimate the value of your benefit accrual in USS in a particular year. It is important to remember that even where a member’s pension savings exceeds the annual allowance in one single year, they will be able to use the ‘carry forward’ facility to bring forward unused relief from the any of the three previous years. The modeller is only an estimate, you should not use it for financial planning purposes.
     
  • Will I still get tax relief on my pension contributions?
    Yes, tax relief will continue to be granted at source on an individual’s marginal rate, and it is worth emphasising that the tax rate of 50% for those with taxable income above £150,000 means that for such individuals tax relief will be available at the 50% rate.
  • I have deferred pension rights in another scheme in respect of an earlier period of employment outside of the sector. Will this be counted in the annual allowance calculation?
    No, deferred benefits in other schemes will not usually be counted as long as they are revalued simply in accordance with inflation (and no greater).  Should you be a member with prior deferred benefits within USS, those deferred benefits will also not usually be counted.  If however, such benefits will be derived from membership of another scheme in any of the years taken into account in a calculation of annual allowance, they will be taken into account for that year: likewise if they are brought into payment, otherwise than on grounds of total incapacity, during the year for which the calculation is being made.
  • At what level of earnings is an individual likely to be affected by the annual allowance?
    USS is, of course, a final salary defined benefits pension scheme, and calculating the annual allowance in these types of scheme depends upon the amount of pensionable service which a member has accrued, and also upon their salary level.  What can be said is that any member who has a salary in excess of £210,000, and who receives a salary increase in the PIP which is equal to or greater than the increase in CPI, will have benefit accrual which will exceed the annual allowance regardless of the number of years of pensionable service.  Members with much lower salaries than £210,000 might also be affected, but for these individuals the likelihood of exceeding the annual allowance is dependent on the number of years of pensionable service and the amount of salary increase during the PIP.
  • Are there any ways to mitigate or eliminate the annual allowance tax charge?

    It is fair to say that there is no magic solution which allows a member to carry on accruing benefits as before whilst avoiding or reducing the tax charge.  Importantly, for many members the conclusion may well be that they should continue in membership of the scheme earning further benefits, as the liability to a tax charge is outweighed in value by the benefits that will be earned in the scheme.  Members should think carefully before they take any action, as for many taking no specific action – and having the new tax charge apply – will be the appropriate response. 

    USS has introduced some options to help members mitigate the effect of the allowances and more details can be found in the factsheet 'Limits to tax relief and tax-free benefits' and its addendum. 

    These are however personal decisions, and it is recommended that members take independent financial advice.
  • If I wish to avoid incurring the tax charge, what option(s) is/are available to me?

    Perhaps the most obvious option for members is to opt-out of the scheme.  A member is not compelled to participate in the scheme, and is eligible to opt-out at any time.  Members contemplating this option are strongly advised to take independent financial advice not least because it may be easier to leave the scheme than it is to return to it on comparable terms.

    Please see the factsheet 'Limits to tax relief and tax-free benefits' and its addendum.
  • What is the effect of opting-out of the scheme?
    When a member opts-out of the scheme, he/she becomes entitled to deferred benefits under the scheme; deferred benefits are not counted for the annual allowance calculation where they have been deferred since before the beginning of the year.  The member will stop paying pension contributions, and the employer will no longer pay the employer contribution on behalf of the member. Importantly the employer may not establish, maintain or contribute to any other pension arrangement for the member unless, in exceptional circumstances, the trustee company gives its consent to this.  Once a member has opted-out, the benefits payable from the scheme in the event of their death or incapacity are significantly reduced, and this loss of death and incapacity cover should be considered very carefully before a person considers making an election to opt out.
  • What other options – in addition to opting-out – are available?
    If a member is currently paying additional voluntary contributions (AVCs) – whether these are “added years” AVCs or money purchase AVCs with Prudential (or indeed with a member’s chosen external provider) – then it would be appropriate to consider reducing or ceasing the payment of AVCs first before considering opting-out of the scheme.  Reducing or ceasing AVCs will reduce the amount of pension accrual or contributions in any particular year, hence reducing the value which is counted for annual allowance purposes.
  • I have more than one post, how does that affect the annual allowance?
    Your benefit accrual in all pension schemes will be taken into account when calculating the annual allowance and therefore if you are a multiple appointment member, all of your USS entitlement will be counted.
  • What if I become part-time?
    Should you reduce your working hours, your benefits will accrue at a slower pace as the service used in the calculation will be reduced.  For example one year worked at 50% of full time will accrue a benefit based upon 183 days, and not 365 days.  As a result, the amount of benefits that you accrue for the purposes of the annual allowance will be reduced.
  • Will a transfer-in cause a one-off spike in my pension accrual thereby triggering an annual allowance charge?
    No, transfers are excluded from the annual allowance calculations in the year they occur.
  • If I retire due to ill-health, will the enhancement be included in the annual allowance calculation?
    There is an exemption included in the new legislation which will mean that it is unlikely that an enhancement included in USS retirement benefits when a member retires by reason of incapacity will be counted for the annual allowance calculation .
  • I have read that the Government is also making changes to the lifetime (rather than annual) allowance. What is the lifetime allowance, and what are the changes?
    The lifetime allowance (LTA) is the maximum amount of pension and/or lump sum that a person can accrue within registered pension schemes (such as USS) that benefit from tax relief.  The current lifetime allowance is £1.8 million.  There is no limit on the amount of benefits that a pension scheme can provide for an individual; however, if the pension scheme provides you with benefits that total more than your lifetime allowance, you will pay a tax charge on the difference between your lifetime allowance and your pension benefits.  The government has announced that the LTA will be reduced to £1.5 million from April 2012.
  • If I have an LTA that is already greater than £1.5 million, will I be protected?

    In 2006 members with large pension values were provided with an opportunity to choose certain types of protection made available by government.  The protection options are known as Enhanced Protection (EP) and Primary Protection (PP).  Those members with EP and PP are unaffected by the government’s latest changes to the LTA (and PP will continue to be worked out by reference to the current LTA of £1.8 million).

    Please note however, the maximum tax-free cash sum available from the scheme will be limited to 25% of the standard LTA applicable at the point of retirement. 
  • If I don’t have protections already, will there be any new protections available?
    Yes, a new protection will be available which will be known as “fixed protection” and it will enable anyone to apply for an LTA of £1.8 million.  This will be conditional on them accruing no further benefits in USS or indeed in any other registered pension scheme.  However, certain inflationary up-rating  will be permitted in the case of the deferred benefits to which a person would become entitled if they elected for fixed protection.
  • What time limits apply to those who wish to elect for fixed protection?
    Members wishing to have fixed protection will have to complete a prescribed form and send it to HMRC by 5 April 2012.
  • My pension is subject to a sharing order, how is that taken into account?
    If your rights to benefit are subject to a pension sharing arrangement, then the reduction in them will be taken into account in the calculation of annual allowance charge, but only for PIPs after that in which the reduction has taken effect.  If it is you who have pension credit rights under a pension sharing arrangement, they will similarly be taken into account only for PIPs after that in which the arrangement has taken effect.  Reductions of rights to benefit by reason of pension sharing arrangements are taken fully into account in calculating the availability of lifetime allowance, as are corresponding increases in rights under arrangements which have come into effect since 5 April 2006.
  • My employer intends to pay an early retirement funding charge (ERFC) together with an augmentation to my retirement benefits. Will either of those payments increase my likelihood of triggering a tax charge?

    The ERFC does not augment a member’s benefits, it is the cost charge to the employer to cover the cost of unreduced pension benefits being paid early, and therefore it does not increase the accrual of benefits in the year that it is paid.

    A retirement augmentation secures additional years of service and therefore it will increase the likelihood of your accrual in that year triggering a tax charge.
  • I have deferred benefits in USS and I may rejoin the scheme on or after 6 April 2011. I understand upon rejoining my past service is normally linked to my future salary, how is that taken into account?

    It has been confirmed by HM Revenue & Customs that in this situation the re-linking is treated like a transfer-in, in other words, in the year the re-linking takes effect it is not counted towards the Annual Allowance calculation, therefore a tax charge will not be generated if you re-link earlier deferred benefits.