Pensions tax FAQs

Do I receive tax relief on my USS contributions?

All of your contributions, including any additional voluntary contributions, are currently eligible for tax relief at the highest rate of income tax that you pay.

Of course, you are taxed upon your pension when it is paid in retirement via the PAYE system, however you will have received the tax relief up front, plus if your marginal rate of tax in employment is greater than it is in retirement, that has a further positive effect overall.

Upon retirement and when you draw your benefits, you have the option to draw 25% of the total value of your benefit as a tax free lump sum.

What is the annual allowance (AA)?

The AA is an annual limit on the amount of pension savings you can build up across all registered pension schemes before you become subject to a tax charge. At present this limit is £40,000 per year but this will be subject to review in the future. You can find out more about the AA by looking at the factsheet included in this section of the website.

What is the lifetime allowance (LTA)?

The LTA is the total amount of pensions savings you can build up across all registered pension schemes before you become subject to an LTA charge. At present the limit is set by the government at £1 million , but this will be subject to review in the future.

The LTA charge is payable on all pension savings above the LTA and is generally paid at retirement, with the current rates being 25% of any pension and 55% of any lump sum in excess of the LTA.

You can find out more about the LTA by looking at the factsheet included in this section of the website.

If I am subject to the AA, the LTA or both, surely I should I withdraw from the scheme?

The answer is not straightforward – even if you are (or may be) subject to AA and/or LTA tax charges you may decide to remain an active member of the scheme and, if so, you may want to consider the USS tax options available to help manage your tax affairs. However, whether or not you should withdraw from the scheme will depend on your individual financial circumstances, and there is no one answer which is appropriate for all members.

The value of your benefits in the scheme will reduce if you are subject to an AA and/or LTA tax charge, and the overall position will be affected by the rate of tax you will pay in retirement.

You should check with your employer any impact on your remuneration of opting out of the scheme or making an election for one of the USS tax options.

If you are not sure what’s best for you, we strongly recommend that you speak to an independent financial adviser (IFA) before making any decision to restrict your pension savings. You can find an IFA through the following website: www.unbiased.co.uk. Please be aware that you may be charged a fee for any advice.

The government are constantly changing the amounts that can be saved into a pension and there would seem to be no guarantee that my benefits will not be subject to further changes. It’s all getting incredibly complicated, should I just save my money elsewhere?

The benefits you have already accrued are protected by law. The is no guarantee that there will not be further change, however, for the vast majority of individuals, saving into a pension scheme is likely to be the most tax efficient way to plan for your retirement.

What tax options are available within USS?

There are two main tax options open for members to use to help manage scheme benefits and pensions tax. These options are enhanced opt out (EOO), which allows you to retain the death in service and incapacity cover offered by the scheme without building up any further retirement benefits, and the voluntary salary cap (VSC), which allows you to cap future accrual of benefits by setting your salary for pensionable purposes lower than your actual salary (no lower than the salary threshold).

Both of these options (or opting out of the scheme) are designed to reduce the tax levied on your pension benefits. However please note that your future USS pension benefits will be reduced as a result. Additionally, although you would pay lower contributions to USS under these options (or none at all if you opt out of the scheme), the money saved would be subject to income tax in the usual way, so you would not get the full value back as take-home pay.

There are specific factsheets on both options, but in brief, EOO was developed for members with LTA issues and VSC to help manage the effect of the AA.

I have reviewed the tax information on your website and undertaken further reading. I am still unsure of what I should do next, can USS help guide and advise me?

Neither USS nor your employer can provide you with tax or financial advice. If you are not sure what’s best for you, we strongly recommend that you speak to an independent financial adviser (IFA) before making any decision to restrict your pension savings. You can find an IFA through the following website: www.unbiased.co.uk. Please be aware that you may be charged a fee for any advice.

Last updated: about 3 months ago