Introduction of Money Purchase AVC early exit charge
Prudential, the scheme’s AVC provider is introducing an early exit charge when Money Purchase AVC (MPAVC) funds are withdrawn within five years of such contributions having commenced. The charge will only apply to the funds of members who commence MPAVCs on or after 19 August 2012 - it will not apply to those who have commenced MPAVCs before that date.
The background to this decision by Prudential is that since the tax simplification changes made by HMRC in 2006 and the subsequent USS rule changes, it has been possible for USS members to elect to draw the whole of their MPAVC fund as tax free cash at retirement.
This has proved to be very popular with USS members who have taken advantage of the considerable tax savings possible. In many cases funds are invested for a short time, often in Prudential's 'deposit fund' investment option (which does not have an explicit administration fee), and then withdrawn as cash. Their current pricing structure assumes contributions will be received over an extended period of time giving a stream of rising management fees on the underlying funds to offset the significant, and largely fixed, cost in setting up a new AVC arrangement due to the operational and FSA compliance requirements.
This combination of circumstances has led Prudential to review its charging for members and introduce an early exit charge on a sliding scale over five years from date of commencement, where the greatest reduction will be 15% if funds are withdrawn within 12 months of commencement. This will apply to all new contributors if the first contributions are received on or after 19 August 2012. To be certain that a member will not be affected by this change contributions must be deducted and remitted from the June 2012 payroll run (for those paid monthly). Contributions which commence in July 2012 may also be exempt but this will depend on individual institution procedures for submitting contributions to Prudential.
Whilst members will still be able to gain some tax advantage from short-term saving, particularly those who pay tax above the basic rate, to receive full value from their savings members should consider longer-term saving by starting to pay MPAVCs earlier, even if this means contributing a smaller amount initially. Members can obtain more information from Prudential either via the website
or by telephoning 0800 515 914.
RELATED RESOURCES : Money Purchase AVC early exit charge (pdf document)