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 the administrating authorities 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 administrating authorities in relation to operating the Scheme Pays mechanism may not be recovered from the member concerned.
Home Office has confirmed that the Relevant Date (also known as the Implementation Date) will be the day coincident with the end of the financial year, so the Relevant Date will be 31 March. The pension input period in the Firefighters' Pension Scheme is aligned to the tax year and so runs from 6 April to 5 April.
This guidance does not consider members who are above Deferred Pension Age (DPA) at their retirement date. Calculations for members who are above DPA at retirement are not covered in this guidance.
The calculation of the pension offset for different categories of member is set out in the following sections. We note that:
- Unlike in the calculation of pension debits following a pension sharing order the pension offset is initially calculated using the member's deferred pension age (unless the member has already attained that age). The offset will later be adjusted to reflect the date their pension comes into payment.
- Pension debits resulting from pension sharing orders have a consequential impact on the benefits payable to a surviving spouse or civil partner upon the member's death. This will not be the case for a Scheme Pays pension offset.
The calculation depends on whether the member is below, or has attained, DPA at the Relevant Date. Details for the two situations are set out below.
Pension offset for member below DPA
Where the active member is below DPA, 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 DPA. The calculation will be carried out at the Relevant Date for the particular member. The calculation of the pension offset is:
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 annual allowance Scheme Pays factor from Tables A1 and A2 based on the member's gender and age at the Relevant Date. These tables are based on DPA.
The pension payable to the member on retirement at DPA will be reduced by an amount equal to the member's pension offset.
Pension offset for member at or above DPA
Where the active member has already attained DPA, the principle is that the pension offset acts like a negative pension entitlement. The offset should be expressed as a deduction to the member's pension which is to be recovered once the member retires. The calculation will be carried out at the Relevant Date for the particular member. The calculation of the pension offset is:
Pension offset for member = 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 annual allowance Scheme Pays factor from Table C1 based on the member's gender and age at the Relevant Date.
The pension payable to the member on retirement will be reduced by an amount equal to the member's pension offset, adjusted to allow for the period between the Relevant Date and the date of retirement.
Pension offsets do not affect Guaranteed Minimum Pensions (GMPs).
Administrators should store the offset calculated above with the Relevant Date on the member's record. Where a member has multiple pension offsets, they should be recorded separately.
The pension offset should be increased as if it were a deferred pension for the period between the Relevant Date and the member's exit from service. Home Office have confirmed that the revaluation should be in line with Pension Increase Orders.
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.
The 2015 Scheme Regulations provide for a deferred pension to be payable without reduction for early payment from the higher of age 65 and the member's State Pension Age at the member's retirement date.
The Deferred Pension Age for the purposes of calculating the initial pension offset will be the higher of age 65 and the member's State Pension Age at the relevant date for the calculation.
The responsible authority has confirmed that State Pension Age for the purpose of the initial calculation of the annual allowance debit should be as set out in HM Treasury Directions, and not legislation in force at the relevant date. Factors are provided to accommodate the range of deferred pension ages members will have in relation to service on and after 1 April 2015 in accordance with the HM Treasury Directions.
No offset will be applied to children's pensions.
No offset will be made to the lump sum death grant payable to an active member who dies in service.
No offset will be made to the death in deferment lump sum award that is payable to deferred members who incurred an annual allowance charge prior to exit, and elected for the Scheme Pays mechanism. However the lump sum will be based on the pension after any Scheme Pays offset has been applied.
No offset is made to any lump sum paid on death after retirement that is payable to pensioner members who incurred an annual allowance charge prior to exit, and elected for the Scheme Pays mechanism. However the lump sum will be based on the 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, if the member leaves with a Club transfer then the Scheme Pays offset will be preserved in the receiving scheme as described in the current actuarial guidance on Individual Cash Equivalent Transfer Values.
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.
When the member retires, the total pension is initially calculated ignoring the pension offset. The pension is then reduced to allow for the pension offset. The offset should be revalued from the Relevant Date up to the April immediately before the date of retirement in accordance with the relevant provisions of the 2015 Scheme Regulations or other relevant Firefighters' Regulations.
The Responsible Authority has confirmed that Deferred Pension Age (DPA) for the revalued pension offset should be based on the member's State Pension Age (SPA) as set in legislation at their retirement date. For the avoidance of doubt, no adjustment will be required to the amount of pension debit following any change to the member's SPA between the initial calculation of the pension debit and the member's retirement date. If the pension is not drawn at DPA then the pension offset will need to be adjusted.
It is the responsibility of administrators to ensure that they are using the most recent factors.
The pension offset to be applied at retirement if the member retires at DPA is as follows:
Pension offset at retirement at DPA = Pension offset x REV
Where:
Pension offset is as calculated in Pension offset for an active member
REV is the revaluation factor between the Relevant Date and the April immediately before the date of retirement.
The pension offset to be applied at retirement if the member retires before DPA is as follows:
Pension offset at retirement before deferred pension age = Pension offset x REV x EPR
Where:
Pension offset is as calculated in Pension offset for an active member
REV is the revaluation factor between the Relevant Date and the April immediately before the date of retirement.
EPR is the Early Payment Reduction dependent on the age at which the member retires. Where the member retires in ill-health the relevant factor should be used from Table B1; for all other cases Table B2 should be used.
Tables B1 and B2 are based on the period to a member's deferred pension age. The period to deferred pension age should be rounded up to the next month. Alternatively, the period is equal to the member's deferred pension age (in years and months) less the age of the member in completed years and months. Where the period from retirement to DPA is not an integer, the reduction factor from the above table should be interpolated for part years.
Cases in which the member retires after DPA are not covered by this guidance.
The pension offset to be applied if the Scheme Pays election occurs when the member's retirement figures are already being processed is as follows:
Pension offset at retirement = 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 annual allowance Scheme Pays factor. If the member is retiring on age grounds then this is taken from Table C1 based on the member's gender and age at the Relevant Date. If the member is retiring on ill-health grounds then the factor is instead taken from Table D1.
In some circumstances a member retiring on ill-health grounds will be exempt from incurring an annual allowance charge in the year preceding retirement. However this will not apply to all ill health retirements. Members who are exempt in their final year of service may also have incurred annual allowance charges, and opted for the annual allowance Scheme Pays mechanism, earlier in their careers. In these cases benefit offsets will be applied at retirement but different adjustment factors (shown in Table B1) will be applied from those used for other retirements (which can be found in Table B2).
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 can be considered separately and treated in accordance with the guidance set out above.
Interaction between annual allowance, Scheme Pays offsets and pension debits
It is possible for members to have both annual allowance Scheme Pays offsets and pension debits resulting from Pension Sharing on Divorce (PSOD). In this case each instance of the annual allowance Scheme Pays offset or the PSOD pension debit is treated in accordance with the relevant set of guidance.
Members exercising options at the point of retirement
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.
Interaction between Scheme Pays offsets and partial retirement
Where a member opts to draw-down their membership, the offset relating to that part of the membership which is being drawn-down should be applied at the point of partial retirement (and having regard to Other benefits section above where relevant). Where the member elects to draw-down only a proportion of the membership, the offset should be pro-rated (in proportion to the membership being drawn-down) and applied to the relevant benefit being drawn-down, with allowance for early factors if appropriate. The remaining offset should be applied when the member eventually retires.
