This section sets out the method and instructions for calculating the initial benefit offsets applied to a member who incurs an Annual Allowance charge and elects to utilise the scheme pays mechanism to meet this charge after beginning to draw their pension benefits. It also applies to all scheme pays offsets attributable to AFPS15. We note that:

• The original legislation which provided for the Annual Allowance scheme pays mechanism required elections to be made and implemented before members began drawing their pension benefits. The MOD understands that this legislation remained in force until 5 April 2013. For that reason, this Section of the guidance should not be applied to any cases due to be implemented with effect from any date prior to that.
• The MOD understands that the requirement for schemes to implement scheme pays offsets prior to pension benefits being drawn no longer applies from 6 April 2013, as a consequence of The Registered Pension Schemes (Reduction in Pension Rates, Accounting and Assessment) (Amendment) Regulations 2013. Subsequent eligible scheme pays elections, in respect of members already in receipt of their pension benefits, should therefore be processed in accordance with this section.
• Members already in receipt of pension benefits will generally have received their pension lump sum benefits prior to the calculation of the initial benefit offsets. In contrast to the process for active members outlined in the Calculation of the initial benefit offsets - member not in receipt of pension benefits (AFPS75, AFPS05, FTRS and RFPS) of this guidance, the MOD has determined that scheme pays offsets for retired members should therefore only be applied to the pension. In this situation no offset will therefore be applied to the member's lump sum.
• Pension offsets resulting from pension sharing orders have a consequential impact on the benefits payable to spouses upon the member's death. This will not be the case for scheme pays benefit offsets.
• For consistency with calculations under Calculation of the initial benefit offsets - member not in receipt of pension benefits (AFPS75, AFPS05, FTRS and RFPS), scheme pays offsets made by retired members under this section are initially calculated on the assumption that they will be applied from age 65. However an adjustment under the section Adjusting the initial benefit offsets when they are applied other than at age 65 should immediately be made, with the pension offset being applied to the pension in payment from the Implementation Date (as defined in Adjusting the initial benefit offsets when they are applied other than at age 65). AFPS15 scheme pays offsets will also be adjusted from age 65 in accordance with Adjusting the initial benefit offsets when they are applied other than at age 65, at the point those benefits in that scheme are drawn.

Calculation of the initial benefit offsets - member not in receipt of pension benefits (AFPS75, AFPS05, FTRS and RFPS), rather than this section, should be applied for tax charges attributable to members of schemes other than AFPS15, who were not in receipt of their benefits at the time the scheme pays election is made.

In the circumstances where this section applies, there is no automatic lump sum payable from the relevant AFPS and so the principle underpinning the AFPS scheme pays mechanism is that a reduction will only be applied to the member's pension. The pension offset will be set up to operate like a negative deferred pension, to be recovered assuming that the pension benefits are to be drawn at age 65.

This calculation of the initial benefit offsets will be carried out at the Relevant Date for the particular member (as determined in accordance with the Relevant Date section of this guidance). The initial benefit offsets will then be adjusted in accordance with Adjusting the initial benefit offsets when they are applied other than at age 65 of this guidance. Where a member is already in receipt of their pension this adjustment will be applied immediately from the Implementation Date, whereas for active members of AFPS15 the adjustment will be applied when the pension is drawn.

The calculation of the initial offsets is:

MEMOFF = AATAX / AAPOFAC

LSOFF = 0

SUROFF = 0

Where:

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

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

SUROFF = survivor's pension offset at the Relevant Date assuming retirement at age 65 - see 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 to AFPS15)

AAPOFAC the AA scheme pays "pension only conversion factor" from Table 1202 for the member's age at the Relevant Date.

The pension that would have been payable to the member at age 65 will be reduced by an amount equal to the member's initial pension offset ("MEMOFF"). However, this 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 Implementation Date.

In most cases the member will be aged below 65 at the Implementation Date, and so the initial pension offset will need to be reduced to reflect that repayment will begin earlier than age 65. However, if the member is above age 65 at the implementation date, the pension offset will need to be increased to reflect that repayment will begin later than age 65 (as set out in Adjusting the initial benefit offsets when they are applied other than at age 65).

In the cases where this section applies members would not generally be entitled to any further automatic lump sums from the scheme. However, where there are any remaining lump sum benefits due to be paid, these will not be reduced. AFPS15 members continue to be able to commute a lump sum from their pension, although the application of the scheme pays offset is likely to limit the maximum amount that a member can elect to commute. This is reflected in the above formula, as in all cases LSOFF is equal to zero.

The benefits payable to a spouse who is eligible to a pension on the member's death will not be reduced as a result of the scheme pays mechanism. This is reflected in the above formula, as in all cases SUROFF is equal to zero.

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.