Rexam changes rules to reduce member tax cost

This means they could reduce the rate of accrual to miss the annual and lifetime allowance limits, which were lowered last year to £50,000 and £1.5m respectively.

Kate Grant, pensions manager at the £1.8bn closed defined benefit scheme, said: "People can choose how much of their pay is pensionable and that allows them to have a lower accrual in the plan."

Schemes that work with members to manage their at-retirement tax costs can give them a better chance of an appropriate retirement income.

Some employers are willing to compensate these members for the contributions they miss out on as a result of halting or reducing their pension saving.

Rexam's rule change

The campaign started in April 2011 when the scheme changed its rules to allow members to reduce the amount of pay they defined as pensionable.

Most companies say if you want to come out of the pension scheme completely that is fine and we will give you some cash

Mike Smedley, KPMG

Of the closed DB scheme's 22,000 members, only 588 are active. The reductions in tax relief only affected a small proportion of those active members and only a handful took advantage of the rule change.

Grant said: "We tend to be very open with our members; we try to give them information. Some people just chose to carry on exactly as they were."

Rexam made the change to give those affected members more flexibility when it came to "rearranging their retirement savings" in a way that suited them, Grant added.

Other schemes wanting to follow Rexam's example may face an administrative challenge to protect their members from higher tax bills, depending on how they calculate the change.

Tim Robson, senior associate at Mercer, said: "If accrual is restricted to an inflation-adjusted £3,125 a year this will mean the £50,000 annual allowance is not exceeded and will reduce the value of pension benefits for testing against the lifetime allowance."

Making sure each member is accruing exactly this amount could prove costly to administer for schemes, he added. Another option would be to move them to a defined contribution scheme.

Robson added: "Members could be given the option of opting out of the DB section and joining the DC section under which future annual contributions would be restricted to £50,000."

Should you help members on tax?

Some companies have chosen to use cash-in-lieu-of-pension payments to compensate highly paid members for reductions in their accrual.

Mike Smedley, pensions partner at KPMG, said pension savers were at risk of "cutting their nose off to spite their face" by reducing their retirement savings to avoid a higher tax charge.

He added that many employers were against telling members to limit accrual to pay less tax. "It is like saying, 'If I give you a pay cut you will have less tax to pay'," he said.

"Most companies say if you want to come out of the pension scheme completely that is fine and we will give you some cash."

Other companies choose to stay out of their members' tax affairs completely. While they will notify them of the change, they will not offer to amend the rules to help them manage it.

They may, however, notify members of the ability to spread their annual allowance over three years. This is known as the carry-forward option.

In April, schemeXpert.com reported on how the Universities Superannuation Scheme was helping members to spread out the effect of their additional contributions.