The universities scheme made a late amendment to its added years benefit to help members avoid an unforeseen annual allowance charge
The Universities Superannuation Scheme acted quickly to avoid members purchasing added years and overshooting the £50,000 annual allowance limit.
The USS is one of a number of private and public sector schemes affected by this tax issue.
It has only come to light since the annual allowance was reduced to £50,000 from the previous tax year, meaning more members on lower incomes would be caught.
There are two main methods schemes can use to combat this challenge, say tax experts:
Encourage members to use the carry forward option to spread the increased savings value over three years.
Put in place uniform accrual, which spreads the purchased extra service over a longer time period.
The USS offers two types of additional voluntary contributions: a straightforward money purchase fund and the more complicated option to purchase additional years of pensionable service.
The scheme board managed to amend its AVCs offer before the end of the tax year by spreading the added years over a longer period, lowering the annual allowance risk.
Schemes that offer this kind of AVC have been urged to review their rules to determine whether members are going to be caught by the allowance limit when they take out the contract.
By helping active members manage their tax burden, schemes give them a better chance of enlarging their retirement pot.
Colin Busby, communications manager at the USS, said: “As soon as the USS board realised there was this concern… we decided we should change the way things work.
"We have stopped [the added years offer] on the old basis and will relaunch it in 2012."
How the USS helped its members
The open defined benefit scheme has 145,000 active members, with around 10% of those having taken added years in the past.
For most people that would avoid the problem of exceeding the annual allowance
Under scheme rules, members were able to purchase extra years of pensionable service by paying an extra percentage of their salary over a set period.
But all these years were counted for tax purposes at the beginning of this payment period.
This means if a member bought 10 added years of pensionable service, the total pension increase of the contract was counted in the year in which the contract was made.
For the USS, that meant 1,100 members who had taken out a contract in the 2011/2012 tax year were at risk of breaching the £50,000 limit.
The board approached the scheme actuary and changed the setup, so members paying for extra service over 10 years would get a tenth of the extra service each year.
Busby said: “For most people, that would avoid the problem of exceeding the annual allowance. But it does mean we have a lot of extra work to do."
The scheme continues to communicate the change with the membership through its employers and its AVCs provider Prudential.
Members have a series of contact points with the scheme, including its website and face-to-face meetings.
Spotting and solving
Private and public sector schemes could both be affected by the changes.
Doug Gardner, technical consultant at Xafinity Paymaster, said schemes should check how their added year AVCs were worded.
Buying just a few added years could cause a spike towards the annual allowance
He added that the traditional way to formulate these contacts would have been to count the pensionable increase at the start of the contract.
"Buying just a few added years could cause a spike towards the annual allowance," said Gardner.
He added that schemes should make use of the three-year carry forward on the annual allowance, or the USS's method of spreading out the pension increase, to limit the impact on members.
But Philip Smith, principal at Buck Consultants, said this form of AVC was outdated in most UK corporate pension schemes.
He added: "Probably about 20 years ago in the private sector you would have found these [arrangements]."
