This section sets out the method and instructions for calculating the initial benefit offsets applicable where a member with an Annual Allowance charge, attributable to AFPS75, AFPS05, FTRS or RFPS, elects to utilise the scheme pays mechanism to meet this charge before beginning to draw their pension benefits. We note that:

• Initial benefit offsets should initially be determined with reference to a retirement age of 65. For the avoidance of doubt, this is different from the approach adopted for pension sharing on divorce which utilises members' current ages, or the deferred pension age of the benefits. The offsets will subsequently be adjusted to reflect the age at which the benefits are brought into payment.
• Pension debits resulting from pension sharing orders have a consequential impact on the benefits payable to spouses upon the member's death. This is not the case for Annual Allowance scheme pays benefit offsets.
• The initial benefit offsets, for members who are not in receipt of their pension benefits at the time of calculation, should be calculated using a proportionate split approach, by reducing both the pension and the lump sum proportionately. If members do not begin to draw their pension at age 65 then the pension and lump sum offsets will be adjusted using the separate pension and lump sum retirement adjustment factors as set out in Adjusting the initial benefit offsets when they are applied other than age 65.
• Calculation of the initial benefit offsets - tax charge attributable to AFPS15 - or member in receipt of pension benefits (all schemes), will apply where pensions are already in payment at the time of the scheme pays election, and for all tax charges attributable to AFPS15.

The principle underpinning the AFPS scheme pays mechanism for those not already in receipt of their pension benefits is that the benefit offsets should operate like a negative deferred pension and a negative deferred lump sum. These offsets should be expressed as a deduction to the member's benefits which are to be recovered assuming the pension benefits are drawn at age 65.

The calculation will be carried out at the Relevant Date for the particular member (as determined in accordance with the section on Relevant Date of this guidance). The calculation of the initial benefit offsets is:

MEMOFF = AATAX / AADFAC

LSOFF = MEMOFF x 3

SUROFF = 0

Where:

MEMOFF = pension offset at the Relevant Date assuming retirement at age 65 - see Initial benefit offset - pension offset.

LSOFF = lump sum offset at the Relevant Date assuming retirement at age 65 - see Initial benefit offset - lump Sum offset.

SUROFF = spouse's pension offset at the Relevant Date assuming retirement at age 65 - see Initial benefit offset - spouses.

AATAX = the Annual Allowance tax charge that the member has notified the MOD that they wish to meet via the scheme pays mechanism (and which has been attributed to this AFPS - where members have transitioned into AFPS15)

AADFAC = the AA scheme pays "default conversion factor" from Table 1201, for the member's age at the Relevant Date

The pension payable to the member from the relevant AFPS at age 65 will be reduced by an amount equal to the member's initial pension offset ("MEMOFF"). However, this initial pension offset will be increased in accordance with the Pension Increase Act (currently reflecting changes in CPI) during the period between the Relevant Date and the date the member eventually begins to draw their pension. The offset will be reduced if a member begins to draw their pension benefits earlier than age 65 or increased if the member begins to draw their pension later than age 65 (as set out in Adjusting the initial benefit offsets when they are applied other than at age 65).

The lump sum payable to the member from the relevant AFPS at age 65 will be reduced by an amount equal to the member's initial lump sum offset ("LSOFF"). However, this initial lump sum offset will be increased in accordance with the Pension Increase Act (currently reflecting changes in CPI) during the period between the Relevant Date and the date the member eventually begins to draw their pension. The offset will be reduced if a member begins to draw their pension earlier than age 65 or increased if the member begins to draw their pension later than age 65 (as set out in Adjusting the initial benefit offsets when they are applied other than at age 65).

The benefits payable to a spouse who is eligible for a pension on the member's death will not be reduced as a result of the Annual Allowance scheme pays mechanism. This is reflected in the above formula, as in all cases SUROFF is equal to zero. This will apply regardless of whether the member dies during active service, in deferment or after retirement.

The following points apply to other benefits:

• No offset will be applied to children's pensions.
• No offset will be made to the lump sum death grant payable to the spouse of the serving personnel who were active members at the date of their death.
• No offset will be made from the death in deferment lump sum award that is payable to the spouse of the deferred member who incurred an Annual Allowance charge prior to exit, and elected for the scheme pays mechanism.