If a member becomes liable to pay the annual allowance charge in any tax year (and certain conditions are met) they can make an election requiring the scheme administrator to pay all or part of the charge on their behalf. This is commonly known as 'scheme pays'. It is the responsibility of administering authorities to ensure that members are eligible for the scheme pays mechanism.
Following an election to use scheme pays to meet the tax charge, a consequential adjustment (annual allowance debit) must be made to the member's benefit entitlements from the scheme.
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.
Annual allowance debits will need to be calculated in respect of each tax year in which a member elects to use scheme pays.
From the 2016/17 financial year onwards, the Pension Input Period (PIP) used by the Fire authorities should be aligned to the tax year i.e. the last day of the PIP is now 5 April each year.
The scheme administrators are responsible for specifying the pension input period and the implementation date. Home Office has recommended that the PIP runs from 6 April to 5 April. However, the implementation of the debit will be from the last day of the financial year i.e. 31 March, referred to in the rest of this note as the 'implementation date'. The rest of this guidance is based on this PIP and relevant date.
Annual allowance debits will not be applied to the benefits payable to a future surviving spouse, civil partner or child on the member's death (including any lump sum on death before retirement).
Annual allowance debits do not affect Guaranteed Minimum Pensions (GMPs).
The member's age (required to select the appropriate factors from Table A1 or Table A2) should be calculated as at the implementation date.
The annual allowance pension debit (AAPD) to apply to the pension entitlement is calculated as:
AAPD (for members below age 60)= AATC / Fp
AAPD (for members aged 60 or above)= AATC / Fpen
Where:
AATC = annual allowance tax charge payable by scheme administrator
Fp = relevant factor found in Table A1.
Fpen = relevant pensioner cash equivalent factor for divorce purposes in force at the implementation date are used. The relevant factors are given in Table A2.
Administrators should store the debit calculated above with the implementation date of these debits on the member's record. Where a member has multiple annual allowance debits, they should be recorded separately.
This section sets out the method and instructions for calculating the debit to be applied at the point of retirement. In many cases this could be several years after the debit was initially calculated.
When the member retires, the total pension is initially calculated ignoring the debit. The pension is then reduced to allow for the debit. The debit should be revalued from the implementation date up to the April immediately before the date of retirement in line with the Pensions Increase Act (currently reflecting changes in the Consumer Price Index ('CPI')). If the pension is not drawn at age 60 then the debit will need to be adjusted to allow for the different period over which it will be deducted. The debit should be increased by a full year's Pension Increase (PI) in the year immediately following retirement (this may not be the same increase that applies to the member's pension).
Each pension debit must be adjusted separately as follows:
Adjusted pension debit (for members retiring at age 60 or below) = AAPD x PI x RTFret
Adjusted pension debit (for members retiring at an age over 60) = AAPD x PI x RTFret / RTFimp
Where:
AAPD = annual allowance pension debit as calculated in Calculating annual allowance debits
PI = pension increase uprating factor applying between the implementation date and the April immediately before the date of retirement
RTFret = adjustment factors for pension debits in force at the retirement date depending on the age at which the member retires. The relevant factors can be found in Table B1, Table B2 or Table C
RTFimp = adjustment factors for pension debits in force at the retirement date depending on the age of the member at the implementation date. The relevant factors are provided in Table B2. For any debits with implementation date before the member's 60th birthday, set RTFimp to equal a value of 1.000
If the member leaves the scheme prior to retirement then the pension debit should be treated in the same way as a pension debit following divorce. In particular if the member leaves with a club transfer the debit will be preserved in the receiving scheme as described in the "Scheme Pays" Debits section of the Club Memorandum. This approach has been agreed with the Club Secretariat.
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 can be considered separately and treated in accordance with the guidance set out above.
It is possible for members to have both annual allowance debits and pension debits resulting from Pension Sharing on Divorce (PSOD). In this case each instance of the annual allowance debit or the PSOD pension debit is treated in accordance with the relevant set of guidance.
Some members are able to exercise options at the point of retirement such as commuting pension for lump sum. This guidance note does not attempt to illustrate the interaction between annual allowance scheme pays offsets and any of these member options.
