This section sets out the method and instructions for calculating the pension offset applied to a member who incurs an Annual Allowance charge and elects to utilise the scheme pays mechanism to meet this charge. The scheme pays mechanism will not be available to all members incurring Annual Allowance charges, and scheme administrators will need to ensure a member's eligibility before applying the approach set out in this guidance document.

It is our understanding from HM Treasury's initial documentation prepared during the development of the revised Annual Allowance regime, that costs incurred by the authorities in relation to operating the scheme pays mechanism may not be recovered from the member concerned.

From the 2016/17 financial year onwards, the Pension Input Period (PIP) to be used has been aligned to financial year i.e. the last day of the PIP is now 31 March each year.

Our understanding is that where members have already had their benefits put into payment, the scheme is not obliged to offer the option of scheme pays on a mandatory basis but can offer it on a voluntary basis. DoF requested that GAD provide guidance on how the scheme pays offset should be calculated for such cases. Please see Calculating the offset when the member has already retired below for the relevant guidance.

The principle is that the pension offset acts like a negative deferred pension. The offset should be expressed as a deduction to the member's pension which is to be recovered from the member's normal pension age (NPA).

Note that pension offset calculations are not affected by the purchase of Effective Pension Age (EPA) or Enhanced Effective Pension Age (EEPA). The offsets are always calculated as a deduction recovered from NPA. Adjustments on early, late and ill health retirement should be relative to the member's NPA.

Normal pension age is defined as a member's state pension age (or 65, if that is higher) in the alpha section. For the purpose of this guidance, a member's expected NPA in the alpha section is the same as their state pension age as set out in the HMT Directions.

The calculation will be carried out at the Calculation Date for the particular member. The calculation of the pension offset is:

Pension offset = AATAX / (AAFAC x REVAL)

Where:

AATAX is the Annual Allowance tax charge that the member has notified the scheme that they wish to meet via the scheme pays mechanism.

AAFAC is the Annual Allowance scheme pays factor from Table A1 (Table 0-601 from Consolidated Factors Workbook), based on the member's gender, age and NPA at the Calculation Date.

REVAL is the relevant revaluation factor from Table REVAL (Table 0-001 from Consolidated Factors Workbook). The appropriate factor is the one corresponding to the number of 1 Aprils between the Calculation Date and the member's NPA. Where the member is older than NPA at the Calculation Date then the number of 1 Aprils should be assumed to be zero.

The pension payable to the member on retirement at NPA will be reduced by an amount equal to the member's pension offset.

Administrators should store the offset calculated above with the Calculation Date on the member's record. Where a member has multiple pension offsets, they should be recorded separately.

The pension offset should have inflation increases (assumed to be in line with the normal revaluation of deferred benefits within the scheme, currently Consumer Prices Index (CPI)) applied during the period between the Calculation Date and the member's eventual retirement. The pension offset should also have inflation increases applied following retirement (assumed to be in line with the normal increases to pensions in payment within the scheme, currently CPI).

If the pension is drawn before NPA, either as a result of early retirement or on grounds of ill health, then the pension offset should be reduced. This is because the offset is generally expected to be applied over a longer period than was assumed when calculating the original offset, so a lower amount should be deducted.

In the case of ill health retirement, the early retirement reduction factor can be found in Table B1 (Table 0-603 from Consolidated Factors Workbook). The appropriate factor will depend on the member's age, gender and NPA. In all other cases of retirement before NPA, the early payment reduction factors for normal health should be used.

Where a member 'buys out' the early retirement adjustment to their pension, the pension offset should still be reduced.

Where a member retires after NPA the pension offset should be increased because the offset is expected to be applied over a shorter period than was assumed when calculating the original offset. Late retirement adjustment factors from Table C1 (Table 0-604 from Consolidated Factors Workbook) should be used.

The benefits payable to a spouse, civil partner or other partner who is eligible to receive a pension on the member's death will not be reduced as a result of the scheme pays mechanism. This will apply regardless of whether the member dies during active service, in deferment or after retirement.

No offset will be applied to children's pensions.

No offset will be made to the lump sum payable to an active member who dies in service.

Lump sum awards which are determined as a multiple of pension and are payable on the death of a deferred member or pensioner member should be based on the pension after any scheme pays offset has been applied.

Options available at retirement, such as commutation or pension allocation, should be based on the residual pension after any scheme pays offset has been applied.

If the member leaves the scheme prior to receipt of their pension then the pension offset should be treated in the same way as a pension debit following divorce (except that the scheme pays offset applies to member benefits only). In particular, our understanding is that if the member leaves with a Club transfer then the scheme pays offset will be preserved in the receiving scheme.

This section sets out the method and instructions for calculating the pension offset to be applied at the point of retirement. In many cases this could be several years after the pension offset was initially calculated.

The offset should be revalued to allow for inflation increases from the Calculation Date up to the April immediately before the date of retirement. If the pension is not drawn at NPA then the pension offset will need to be adjusted.

The pension offset to be applied if the member retires at NPA is as follows:

Pension offset at retirement at NPA = Pension offset x INFL

Where:

Pension Offset is as calculated in Calculation of the pension offset above.

INFL is the Pensions Increase Act (PI Act) multipliers between the Calculation Date and date of retirement.

The pension offset to be applied if the member retires before NPA is as follows:

Pension offset at retirement before NPA = Pension offset x INFL x ERF

Where:

Pension Offset is as calculated in Calculation of the pension offset above.

INFL is the PI Act multipliers between the Calculation Date and date of retirement.

ERF is the early payment reduction factor as follows: where the member retires in ill health the relevant factor from Table B1 (Table 0-603 from Consolidated Factors Workbook) should be used. For all other cases, the early payment reduction factors for normal health should be applied, further details of which are set out in the alpha early retirement guidance.

When applying the factors in Table B1:

• Where the number of years from retirement to NPA is not an integer, the reduction factor should be interpolated for part years.
• Similarly where the NPA is not an exact integer the reduction factor should be interpolated between the integer NPAs above and below.
• To enable the relevant ill-health early retirement factor to be calculated for a member retiring within 12 months of NPA, the administrator should interpolate between the 0 years and 1 year factors for the relevant number of months that the member retires early.

The pension offset to be applied if the member retires after NPA is as follows:

Pension offset at retirement after NPA = Pension offset x INFL x LRF

Where:

Pension Offset is as calculated in Calculation of the pension offset above.

INFL is the PI Act multipliers between the Calculation Date and date of retirement.

LRF is the relevant factor in Table C1 (Table 0-604 of the Consolidated Factors Workbook). Note that the LRF will be different for offsets incurred before and after NPA.

Where the Calculation Date for the pension offset is after the member's NPA, the relevant late retirement increase should be calculated by dividing the factor at the member's actual retirement age by the factor at the member's age on the Calculation Date.

Where the number of years from NPA to retirement is not an integer, the reduction factor from Table C1 should be interpolated for part years.

Multiple Annual Allowance and scheme pays offsets

Some members may breach the Annual Allowance on more than one occasion during their careers. Since there is no limit on the number of times a member may opt to utilise scheme pays (subject to usual eligibility), a member may also have multiple Annual Allowance scheme pays offsets. In this circumstance each offset should be considered separately and treated in accordance with the guidance set out above.

Our understanding is that where members have already had their benefits put into payment, the scheme is not obliged to offer the option of scheme pays on a mandatory basis but can offer it on a voluntary basis. DoF has requested that GAD provide guidance on how the scheme pays offset should be calculated for such cases.

Where the member has retired before the Calculation Date but their benefits are not yet in payment when they request scheme pays, the offset should be calculated as set out in the sections Calculation of the pension offset and Adjusting benefit offsets at retirement above. Any backpay for the period between retirement and payment should make allowance for the pension offset at retirement.

Where the member has already retired, and their benefits are already in payment by the calculation date, the offset should be calculated as follows:

Pension offset = AATAX / AAFAC

Where:

AATAX is the Annual Allowance tax charge that the member has notified the scheme that they wish to meet via the scheme pays mechanism.

AAFAC is the pensioner member's scheme pays factor taken from:

• Table D1 (Table 0-605 of the Consolidated Factors Workbook) where the member retired in normal health.
• Table D2 (Table 0-606 of the Consolidated Factors Workbook) where the member retired in ill health.

The appropriate factor depends on the member's gender and age at the Calculation Date. The same factors are used regardless of the member's NPA.

For the avoidance of doubt, the member's age at the calculation date, not their age at retirement should be used to calculate the pension offset. The pension offset should not be backdated to the member's retirement date.