Limits to tax relief and tax-free benefits · PDF fileLimits to tax relief and tax-free...

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Limits to tax relief and tax-free benefitsIntroductionPension benefits earned by individuals in the UK, which qualify to receive tax relief, are restricted to maximum allowances permitted by HM Revenue & Customs (HMRC).

The value of your pension benefits across all schemes in which you are accruing benefits is limited for taxation purposes in two ways:

The Lifetime Allowance (LTA) – this is a threshold for the tax favourable benefits you can receive on retirement (from all schemes). You can accrue benefits in excess of this limit but benefits over the limit will be subject to a tax recovery charge (25% of pension at the time of publication). The LTA is currently £1.5 million. It will reduce to £1.25 million on 1 April 2014.

The Annual Allowance (AA) – this measures the increase in the value of your benefits over a 12 month period, called the pension input period (PIP). The PIP for a member of USS is 1 April to 31 March the following year. The AA is currently £50,000 a year. It will reduce to £40,000 on 1 April 2014. Any excess accrued over the limit may be subject to tax at your highest marginal rate1.

Maximum tax-free cash – a limit also applies to the amount of tax-free cash you can receive on retirement. This is 25% of the value of your benefits (or 25% of the LTA if this is lower).

For more information, please see the ‘Tax-free cash options’ factsheet at www.uss.co.uk

If you exceed the AA, it is your responsibility to tell HMRC about the increase in the value of your benefits using a self assessment tax return. Your employer and USS will be able to help you gather the information you require for your tax return. There is more information about the requirements later in this factsheet.

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TAX LIMITS FINAL SALARY AND CAREER REVALUED BENEFITS SECTIONS

1The value of deferred benefits held with other pension schemes does not count towards the AA unless they were built up during the same PIP.

Lifetime Allowance (LTA)

The effect of the LTA on your retirement benefitsYou can build up any amount of benefits you wish. However, benefits in excess of the LTA are subject to a tax charge. For the purposes of comparing your benefits against the LTA, the capital value of your USS benefit is:

(Pension x 20)

+ Any tax-free cash you decide to take

+ The fund value of any USS Money Purchase AVCs

When measuring against the LTA figure, you must include any other benefits you are entitled to from other registered pension schemes (any pension scheme approved by HMRC), if they have already been brought into payment or will be on the same day as your USS benefits2.

If the total value of all of your retirement benefits exceeds the value of the LTA, a tax charge is applied to the excess. The remainder of the excess can be taken as additional pension or lump sum. For example, if the total capital value of your benefits was £1.6 million in the 2013/14 tax year, assuming you could not or did not opt for one of the protection methods discussed in the next section, you would have an excess benefit value of £100,000 (£1.6 million – LTA of £1.5 million).

•Assumingthatyouchooseyour£100,000excesstobe treated as pension, USS would first deduct 25% tax, with the remaining £75,000 then being converted into an annual pension. This would be based on the scheme commutation factor at your date of retirement (for example £75,000/17.576* = £4,267.18). After the initial LTA tax charge of 25%, your pension will then be taxed under PAYE. For a member who pays tax at 40%, this means that the total tax deduction will effectively be at least 55%. For 45% tax payers, this would be even higher. Taking any excess as pension might be an attractive option if you plan to become resident overseas in a country with lower tax rates than the UK.

•Youcouldalsochoosetotakeyourexcessaslumpsum. Here, your excess is recalculated with reference to your commutation factor* under the scheme at your date of retirement (if your commutation factor is less than the HMRC conversion factor** of 20 this will have the effect of reducing your excess).

For example

£100,000 x 17.576* = £87,880 excess.

20**

This is then taxed at 55%.

USS would pay £48,334 to HMRC on your behalf and pay you a lump sum of £39,546 in addition to your remaining pension and lump sum benefit.

2Benefits already in payment before April 2006 are valued at 25 times the value of the annual pension in payment.

*Commutation factor for a 65-year-old male members as at August 2013. **HMRC conversion factor for final salary pension schemes is 20.


LTA values

Fixed protection – 2012 and 2014Due to reductions in the LTA, methods of benefit protection (called fixed protection) have been introduced by HMRC. These protections allow pension scheme members to apply to retain the higher LTA value.

•Fixed protection 2012 – a LTA of £1.8 million to be retained. HMRC accepted applications up to and including 5 April 2012.

•Fixed protection 2014 – a LTA of £1.5 million to be retained. HMRC to accept applications up to and including 5 April 2014.

With Fixed Protection 2014, your LTA will be £1.5 million. Any benefits accrued up to this figure, rather than the £1.25 million figure, will not incur a tax charge.

With Fixed Protection 2014 you need to stop building up pension benefits. You can lose this protection if you pay any further contributions to USS or any other pension arrangement.

You need to apply for Fixed Protection 2014 before 5 April 2014. You cannot have Fixed Protection 2014 if you have already elected for one of the earlier forms of protection, namely primary, enhanced or fixed protection (2012). If you wish to opt out of the scheme in order to ensure fixed protection is not lost, you will need to advise the Pensions Officer at your institution that you are opting for Fixed Protection 2014 so they can arrange for your membership to be terminated before 5 April 2014. Once you have opted out the benefits you have earned in USS to April 2014 would be increased in such way that that you will not lose your fixed protection, as long as you don’t make further contributions to the scheme.

If you’re unsure of the current LTA value of your benefits, you can request this figure from USS. Please contact the Pensions Officer at your institution to arrange this. Alternatively you can obtain an estimate by logging in to the USS Benefit modeller at www.uss.co.uk (Final Salary section members only).

Individual protection – 2014As well as fixed protection 2014, the Government has announced that ‘individual protection 2014’ will be available when the LTA is reduced to £1.25 million in 2014/15. The details of individual protection 2014 will be confirmed by HMRC, but it is expected that:

•ItwillgiveyouapersonalLTAequaltothevalueofyour pension rights on 5 April 2014 – up to an overall maximum of £1.5 million.

•Anyonewithpensionsavingsworthmorethan£1.25million at 5 April 2014 (who does not hold enhanced or primary protection) can apply.

•Youwillnotloseindividualprotection2014bymakingfurther savings in to your pension scheme.

•AnypensionsavingsinexcessofyourLTAwillbesubject to a LTA charge.

You’ll be able to apply for individual protection from 6 April 2014 when the appropriate forms become available, and you will be given a personal LTA value by HMRC based upon your pension benefits accrued as at 5 April 2014. As mentioned above you cannot lose this protection by continuing contributions to your pension arrangements, however you will pay a tax charge on any further benefits you accrue above your individual protection LTA amount. It is expected you will have up to three years from April 2014 to apply and therefore the application does not need to be made in advance as is the case with fixed protection elections. We will provide further information when HMRC confirms the details.

You can apply online or download the form to apply for fixed protection and/or individual protection from www.hmrc.gov.uk/pensionschemes/pension-savings-la-htm#5

2010/11 – 2011/12 £1.8 million

Year LTA

2012/13 – 2013/14 £1.5 million

2014/15 – onwards £1.25 million



Enhanced and Primary ProtectionWhen the simplification of pension taxation rules was introduced in April 2006, there were some members who had built up benefits under the old system of pension taxation where they would not have been taxed. To help facilitate the transition and ensure that individuals who had already accrued large pension benefits would not be unfairly taxed, the government allowed two forms of transitional protection: Enhanced Protection (EP) and Primary Protection (PP). These options were only available between April 2006 and April 2009 and you could have opted for either or both depending upon your circumstances. If you elected for EP or PP, this will still be valid. If you have not applied for either of these forms of protection, you are no longer able to do so.

Please refer to the HMRC website for full details on how these forms of protection work at www.hmrc.gov.uk/pensionschemes/protection-of-existing-rights.pdf


Annual Allowance (AA)

This is a measure of the increase in your benefits in a defined benefit scheme or your contributions to a money purchase arrangement in any PIP. The AA is currently set at £50,000 a year. It will reduce to £40,000 a year from 1 April 2014. Any excess benefit over this allowance is taxed at your highest marginal rate.

How is the AA measured?

•InadefinedbenefitschemesuchasUSS–itistheincrease in the value of your benefit over the course of the year which is measured, not the contributions which have been paid by either you or your employer.

•Inamoneypurchasearrangement–itwillsimplybe the contributions which you have paid which are measured. Investment returns are not included in the AA calculation for money purchase benefits.

So, to consider how this works for USS benefits, your accrual over the course of a year is calculated for the purposes of the AA in three stages:

The opening value – the pension is calculated at the beginning of the PIP (1 April) as if you were entitled to your benefits at that date, but without applying any actuarial reductions for early payment. That pension is then rolled forward based upon the increases in the Consumer Prices Index (CPI) to ensure it takes some account of inflation. The revalued pension is then multiplied by 16 and the lump sum added to give a capitalised value.

The closing value – the pension is calculated at the end of the PIP (31 March of the following year), without applying any actuarial reductions. This pension is then multiplied by 16 and the lump sum added to give a capitalised value. Note that the revaluation step in point 1, to account for inflation, is not included here.

Accrual – the opening value is subtracted from the closing value and the increase over the course of the PIP is then measured against the AA for that year. Any excess over AA is subject to tax.

It is important to note that for final salary members, the increases you receive to your salary will have a bearing on the value of your benefits along with the amount of service you have accrued. You may not have a particularly high salary but if you receive a large increase in your pay, perhaps if you take on a new position, then this may take you over the AA, particularly if you have a long service with the scheme.

The following example shows how your salary affects your AA:

Example

If you had 30 years’ service on 1 April and your pensionable salary was £50,000, your pension on 1 April would be:

30 x 1 x £50,000 = £18,750 a year 80

CPI increase: 5.2%

Pension after CPI increase: £18,750 x 1.052 = £19,725 a year

Following a change in your job, at 31 March the following year your pensionable salary increased to £58,000 a year. Your pension at 31 March was therefore:

31 x 1 x £58,000 = £22,475 a year 80

So, the increase in your pension over the year was:

£22,475 – £19,725 = £2,750

And the capital value to check against the AA would be:

£2,750 x 19* = £52,250

*A factor of 19 is used to take into account the scheme lump sum, i.e. 16:1 standard pension plus three for the additional lump sum.

So, this example (based on a AA of £50,000 a year) shows that you would have exceeded the AA by £2,250 and this amount may be subject to tax. Although this example is based on the final salary section, the same principle applies to the Career Revalued Benefits (CRB) section. However, as salary increases do not affect benefits built up in prior years, it is far less likely that a member of the CRB section will trigger an AA tax charge.

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How does an Added Years or Revalued Benefits AVC affect the Annual Allowance?Final salary members can purchase additional service (added years) by paying an Additional Voluntary Contribution (AVC), whereas CRB members purchase additional revalued benefits. Using added years AVCs as an example, for monthly AVC contracts taken out on or after 1 April 2012, a proportion of the total service you would have purchased by the end of the contract counts for the purpose of AA calculations. So, if you took out a contract to buy an additional five-years’ service over a 20-year period, this would equate to the purchase of an additional 92 days of service for each of those 20 years, which would be included in the closing value calculation each year.

Example – added years AVCs (commenced on/after 01/04/2012)

Your pension was £10,310 at the start of the year.

You pension was £11,025 at the end of the year before the contract was set up.

You set up a contract to purchase five additional years’ service at age 65 by paying monthly contributions.

Your pensionable salary is £42,000 a year.

The increase in the value of your pension at the end of the year would be: £11,025 + 92 / 80 x £42,000 = £11,157 a year 365

The increase in pension over the year is therefore: £11,157 – £10,310 = £847

The AA figure would now be: £847 x 19 = £16,093

For monthly AVC contracts taken out prior to 1 April 2012, service counts in full for the purpose of AA calculations.

So, if you took out an AVC contract before 1 April 2012 to purchase an additional five years, then in the PIP for the year the contract commenced, a five-year increase in service would be added to the closing value calculation.

Example – added years AVCs (commenced between 01/04/2011 – 31/03/2012)

Your pension was £10,310 at the start of the year.

Your pension was £11,025 at the end of the year before the contract was set up.

You set up a contract to purchase five additional years at age 65 by paying monthly contributions.

Your pensionable salary is £42,000 a year.

The increase in the value at the end of the year would be: £11,025 + (5/80 x £42,000) = £13,650 a year

The increase in pension over the year is therefore: £13,650 – £10,310 = £3,340

The AA figure would be: £3,340 x 19 = £63,460

So, if this contract was set up, assuming there was no carry forward available from earlier years (this is explained on the next page), you would be facing a tax charge on the amount over £50,000 which, in this example, would be £13,460.

These examples are based on the final salary section, but the same principle applies to the CRB section. An exercise has been carried out for all members who took out an AVC contract between 1 April 2011 and 31 March 2012, offering them the option to stop their current contracts and start a new one.

How does a Money Purchase AVC affect the Annual Allowance?This is very easy to work out. The gross amount deducted from your pay (before tax relief ) is the value you add in to the AA calculation. So, it’s much easier to work out how much you can pay in to the Money Purchase AVC and stay within the AA limit.

Are deferred pension benefits counted?Deferred benefits are payable to you when you retire from schemes into which you no longer pay contributions.

Any deferred benefits accrued during the PIP count towards the AA for that period. After that year, none of the previous deferred benefits count towards the AA.

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Other pension arrangementsIt is extremely important to remember that HMRC value all of your pension benefits earned when looking at your AA.

When working out your total pensions savings during any year, you must include pension savings from any other pension scheme that you have been a member of during the year. You should contact the administrators of any other pension arrangements, whether they are occupational or personal pension arrangements, to obtain this pensions savings figure from them. The combined value is classed as your total pension savings for the tax year.

What if I’ve exceeded the Annual Allowance?With the AA set at £50,000, and reducing to £40,000 on 1 April 2014, there is a real possibility that more members of the final salary section may trigger an AA charge due to a one-off event, such as a promotion. This is far less of an issue for members of the CRB section as future salary increases do not affect past service. The government has put measures in place to try to mitigate the problem for those who have a one-off salary spike and those measures are called ‘carry forward’.

Under carry forward, any unused allowance for the three years prior to the one in which an AA charge is due can be used to offset an AA charge. If the total of the unused relief is greater than the accrual over the course of the PIP in question (or reduces the accrual to less than the AA in force during the PIP), then the amount payable will be reduced to zero.

So, if you trigger the AA charge in 2012/13, you can draw upon unused allowances for the tax years 2009/10, 2010/11 and 2011/12 to offset the charge. Importantly, it will be assumed that the AA for those prior years and the revaluation factor are £50,000 a year and 16:1 (plus the standard tax-free cash sum) respectively.


Carry forward

Calculating your unused allowance (carry forward)If your total pension savings for the PIP in question are more than the AA, you can carry forward any unused allowance from the previous three years. You must use the AA in the current PIP first, then go back to the earliest of the three carry forward years available.

You will only have to pay tax if you are still in excess of the AA having taken account of any unused allowances.

You can only carry forward unused allowance if, during the tax year, you were a member of either:

•aregisteredpensionscheme(suchasUSSorTPSandthe majority of other occupational pension schemes in the UK); or

•anoverseaspensionschemeandeitheryouoryouremployer qualified for UK tax relief on pension savings in that scheme.

The calculation is complicated and we strongly suggest you seek financial advice.

It is important to note that unused allowance in the PIPs that end in the 2009/10 and 2010/11 tax years is based on a notional AA of £50,000 a year even although the actual allowance for those years was considerably higher.

You do not need to complete a tax return in relation to those years where you do not exceed the AA once you have taken into account any carry forward, but you will need to keep a record of your calculations in case your pension savings exceed the AA in a subsequent tax year.

More information about the AA and carry forward allowances can be found at www.hmrc.gov.uk/pensionschemes/ annual-allowance/guide.htm

HM Revenue & Customs (HMRC) have developed a calculator to help you work out whether or not you are liable to any tax. You will find this on HMRC’s website here www.hmrc.gov.uk/tools/pension-allowance/ calculator.htm

The AA is a personal taxation matter, however, since April 2013 pension schemes have a statutory responsibility to provide you with a savings statement by 6 October each year if you have exceeded the AA. USS will issue statements in September each year to members who have exceeded the AA during the previous tax year/PIP.


Scheme pays

What if I have exceeded the Annual Allowance after allowing for carry forward? If you have exceeded the AA and you do not have any or enough carry forward to use, you will face a tax bill.

You are responsible for providing information to HMRC using a self assessment tax return. If you don’t normally complete a self assessment tax return, you’ll need to register with HMRC to complete one.

HMRC has a helpsheet which you may find useful.

Search for HS345 on www.hmrc.gov.uk to find the ‘Pensions - tax charges on any excess over the Lifetime Allowance, Annual Allowance, Special Annual Allowance and on unauthorised payments’ helpsheet.

How can the charge be paid?You could choose to settle the charge yourself from savings, or if you’re retiring and taking a tax-free lump sum, you could put aside some of the tax-free cash sum to settle the tax charge.

The government has decided that members of registered pension schemes, such as USS, will be able to ask the scheme to pay an AA tax charge on their behalf in return for a deduction to benefits. This is called ‘scheme pays’. Although this sounds simple in theory, in practice there is a lot to consider.

When can I use scheme pays?If your:

•BenefitaccrualinaUSSPIPisgreaterthantheAAinforce during that period; and

•YouroverallAAtaxchargeismorethan£2,000.

You can ask the scheme to pay the charge for you, with a corresponding deduction made to your benefits.

How much can I ask the scheme to pay?If you have exceeded the AA as a result of benefits built up in two or more pension arrangements, then USS will pay a tax charge in relation to any excess allowance built up in USS.

For further details and an illustration of how this would work in practice please refer to example 6 (page18) on HMRC helpsheet 345 available from www.hmrc.gov.uk/helpsheets/hs345.pdf

The amount of tax charge you wish USS to pay on your behalf may be more or less than £2,000, as you can pay part of the charge with the pension scheme covering the remainder or, if you wish, require the pension scheme to cover the whole charge.


What do I need to do to use scheme pays?You will need to complete a self assessment tax return by no later than 31 January following the tax year in question and confirm to HMRC the amount of any AA charge which is to be paid by the scheme. You will then have until the following 31 July – or retirement if earlier – to notify USS of the AA tax charge to be paid on your behalf.

It is your responsibility to ensure that the amount of the AA tax charge is correctly calculated. The scheme will not be in a position to calculate your tax for you. You should also bear in mind that a scheme pays notification cannot be cancelled, but it may be amended.

If you decide to pay part of the AA tax charge, and the nominated amount of the scheme’s liability is less than £2,000, then you will need to write to USS confirming that your total AA charge is over £2,000.

As your liability to the AA charge can change, you can submit a further notice to the scheme, requesting payment of an additional AA tax charge via scheme pays as long as your benefits have not crystallised (for example you have not become eligible to take your benefits) and it is received no later than 31 July following the end of the four year period beginning on the last day of the relevant tax year.

Example

If you exceeded the AA in 2012/13 (as a result of USS pension accrual) the latest date for submission of an amendment to scheme pays would be 31 July 2017.

For self assessment purposes the USS pension scheme tax reference number is 00330004RR.

Can I use scheme pays if I am due to retire or over normal pension age (65)?The answer to this is yes, however, your notice must be given to the scheme before your benefits are drawn, rather than the July after your self assessment return was due.

In practice, if you have requested a retirement quotation from USS it will include your accrual for the PIP in which you retire and the previous year, if this information has not already been issued. If you calculate that your AA tax charge for the PIP in which you retire will exceed £2,000, or perhaps the PIP prior, then you can give notice to the scheme to pay the charge on your behalf.

As mentioned, you must submit your notice to USS before retiring so that the appropriate deduction can be applied before your USS benefits are brought into payment. The opportunity to rely on scheme pays will be lost if your notice is not given prior to your benefits crystallising. There is a section in the USS retirement forms where you can note your intention to use scheme pays.

It is possible that you will not know for certain what your AA tax liability is for the PIP in which you retire until the end of the tax year – and therefore after your retirement date – as you will need to know what your taxable earnings were for the year. In that event, you can submit a scheme pays notice to USS shortly before your retirement on the basis of the information which is then known to you.

You will need to inform HMRC of any amendments once your taxable earnings for the year are known.


How is my deduction calculated?There are two methods of calculating the deduction to be made from your benefit under scheme pays.

You ask USS to pay your tax charge:

•Atthepointofretirement;or

•Asyouareapproachingretirement;or

•Ifyouareage65orover.

In these circumstances, the pension debit will be calculated using the commutation factors applicable at retirement / the calculation date. We use the same factors that are used if you wish to commute pension to extra cash or vice versa. This amount would then be deducted from your pension.

Should you wish to investigate this option and receive a quotation of the reduction to your annual pension, please contact Sharon Harvey on 0151 478 7045 or [email protected]

You ask USS to pay your tax charge when you:

•Areunderage65;or

•Notcontemplatingretirement.

In these circumstances, the pension debit will be calculated using the current scheme transfer factors.

If you would like a quote showing the reduction to your annual pension under this category, please use the scheme pays calculator on www.uss.co.uk

How will my benefits be affected under scheme pays?In return for the scheme paying the AA tax charge on your behalf, a deduction (known as a pension debit) will be made to your pension benefits. The deduction will be expressed as an amount of pension (and lump sum) which is equivalent to the cash value paid to HMRC. The amount of the deduction will be confirmed in writing when you inform USS of the tax charge to be paid.

Your pension debit will be adjusted each year by increases to official pensions4 (this is currently based upon increases in the Consumer Prices Index and subject to the maximum pension increases payable under the scheme rules) until your benefits are drawn. The benefits payable to you will therefore be calculated after deducting the revalued scheme pays pension debit.

The following is a simple example of how the scheme pays pension debit will affect USS benefits:

Mr Smith requests that USS pay a tax charge on his behalf under scheme pays. The tax charge amount is £55,678.

Based upon Mr Smith’s age and gender at the date of payment (59 year old male), a pension deduction of £2,161.65 a year (and lump sum of £6,484.95) is equivalent to the tax charge of £55,678.

The £2,161.65 a year debit will be increased in line with official pensions until the member’s benefits fall due, at which point it will be treated as a deduction from those benefits.

Mr Smith retires five years later. His pension, before any deduction, is £70,000 at retirement. His pension deduction, due to scheme pays, has increased during those five years to £2,758.87 a year5.

£70,000 – £2,758.87

= £67,241.13 pension a year

= £201,723.39 lump sum (3 x annual pension)

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4The deduction will reduce the amount of pension and cash available to you at retirement.5CPI has been assumed to be 5%.


Is it possible to have multiple scheme pays debits?Yes. It is possible that a member could trigger the AA charge more than once and therefore he/she will have a scheme pays debit for each year in which the scheme is required to pay the charge.

Will a scheme pays debit affect any benefits which may be payable to beneficiaries?No. Only the member’s pension will be reduced, any benefits which may become payable to a beneficiary (such as a spouse, civil partner, child or dependant) will be unaffected.

In the event of your death before retirement, no deduction will be made from any lump sum payments which may become payable from the scheme. Effectively, scheme pays results in a deduction to a member’s benefits only.

Historic limitsMembers joining or re-joining USS on or after 1 June 1989 were subject to a statutory earnings cap for pension purposes, set by HMRC. The contributions payable by the member and the institution were based on a maximum amount determined by the government. The amount was usually reviewed annually to reflect changes in the Retail Prices Index and rounded to the next higher multiple of £600. Any amount in excess of the cap could not be taken into account when calculating pension benefits. The figure for the final year of the statutory earnings cap (2005/06) was £105,600.

The statutory earnings cap was removed with effect from 6 April 2006, but for the purpose of calculating USS benefits its effect on past service accrued prior to that date remains. Members who were subject to the earnings cap as at April 2006 had the option to continue to have their future benefits subject to the cap. The continuation of the statutory earnings cap is written into the USS scheme rules and is known as the ‘scheme specific cap’. It is increased on an annual basis using the same methodology as the statutory cap. The scheme specific cap will be revalued each year and any past service benefits, which were capped, will be based on the relevant figure at retirement. In addition, it will be used as the basis for ongoing contributions for any members who decided to keep the cap for future accrual.

If you are unsure whether the cap applies to part of your USS benefits, please check with your employer.

Dealing with the statutory earnings capIf you were affected by the statutory earnings cap for any service from 1 June 1989 (14 March 1989 in some cases) to 6 April 2006, your benefits accrued from 6 April 2006 will now be calculated by reference to your full pensionable salary. Your pension contributions will also be based on your actual salary (unless of course you requested that your salary remained capped by the USS scheme specific cap).

If, after 6 April 2006, the earnings cap no longer affects you, your benefits will be calculated in at least two parts:

•Thebenefitsfrom1989(ordateyoujoinedtheschemeif later) to April 2006 will be calculated by reference to the scheme specific cap in the year in which you retire or leave.

•ThebenefitsfromApril2006willbecalculatedbyreference to your full pensionable salary.

Additionally, if you have transferred benefits into USS from another scheme based on an uncapped salary, or you have earlier uncapped service, these will continue to be calculated by reference to your full pensionable salary.

You and your employer have the option of making a payment to remove the effect of the earnings cap in all or in part. There is only one opportunity to make a payment to remove the effect of the cap, however there is no time restriction on when this is made, so long as you remain an active member of the scheme.

If a payment is made to completely remove the effect of the earnings cap, then all of your benefits will be calculated by reference to your full pensionable salary. If only part of the earnings cap is removed then your benefits will be calculated separately, but with a reduced amount being subject to the cap. There are some restrictions on removing the cap; please speak to your employer regarding your options.

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This publication is for general guidance only. It is not a legal document and does not explain all situations or eventualities. USS is governed by a trust deed and rules and if there is any difference between this publication and the trust deed and rules the latter prevail. Every effort has been made to present accurate information at the date of publication and members are advised to check with their employer contact for latest information regarding the scheme, and any changes that may have occurred to its rules and benefits.

Designed by Anthony H

odges Consulting Lim

ited 2013_3264

Limits to tax relief and tax-free benefits_12/13

Earnings cap - calculating your pensionBelow is an example where a member has service subject to the cap up to April 2006. In this example, the member also has service transferred into USS that was not originally subject to the earnings cap and is therefore not subject to the cap in USS.

How does this work?

Date joined USS: 1 September 1994

Date of birth: 14 July 1954

Anticipated retirement date: 30 September 2014

Transferred-in service from NHS: 15 years

Pensionable salary (full): £170,000 a year

Scheme specific cap: £141,000 a year

Firstly, we need to work out which elements of service are, and are not, subject to the earnings cap.

We know that the transfer-in is not subject to the cap and we also know that service from April 2006 is not subject to the cap (unrestricted service): 6 April 2006 to 30 September 2014 = 8 years and 178 days (unrestricted)

Transferred-in service = 15 years (unrestricted)

Total unrestricted service = 23 years and 178 days

Service subject to the earnings cap: 1 September 1994 to 5 April 2006 = 11 years and 217 days

Total restricted service = 11 years and 217 days

The member’s pension calculation would be calculated as follows: 23 years and 178 days x 1/80th x £170,000 = £49,911.30

PLUS

11 years and 217 days x 1/80th x £141,000 = £20,435.34

Total pension = (£49,911.30 + £20,435.34) = £70,346.64 a year

Additionally, the standard tax-free cash lump sum is simply three times the resulting pension.

In April 2006, members who we thought might be affected were issued with a benefit statement so they could undertake these calculations. Please contact your employer if you require a copy.

Financial AdviceThe Trustee Company recognises that you may wish to seek financial advice on your options.

If you visit the USS website www.uss.co.uk you can view a list of financial advisers.

These advisers have been selected on the basis that they possess the highest level of qualification in retirement planning – they have also received training on the specific features of USS.

If you think you may be affected by any of the information held in this factsheet, please also refer to the addendum to the ‘Limits to tax relief and tax-free benefits’ factsheet on the website www.uss.co.uk

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