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) 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 PIP and the implementation date. The Welsh Government has recommended that the PIP runs from 6 April to 5 April and that implementation of the debit will be from the last day of the financial year (i.e. 31 March). The rest of this guidance is based on this PIP and implementation date (also referred to as the 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 A) should be calculated as at the implementation date.
The annual allowance pension debit (AAPD) to apply to the pension entitlement is calculated as:
AAPD = AATC / Fp
Where:
AATC is the annual allowance tax charge payable by scheme administrator
Fp is the relevant factor from Table A1 or A2 (Factors for Special members are contained within these tables).
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 CPI). If the pension is not drawn at age 65 (age 60 for Special members) 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 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:
For members retiring at normal benefit age:
Adjusted pension debit = AAPD x PI
For members retiring at a time other than normal benefit age:
Adjusted pension debit = AAPD x PI x RTF
Where:
AAPD is the annual allowance pension debit as calculated in Calculating annual allowance debits
PI is the pension increase uprating factor applying between the implementation date and the April immediately before the date of retirement
RTF is the adjustment factor for pension debits in force at the implementation date depending on the age at which the member retires. The relevant factors are provided in the Tables B1, B2 or C for standard members, or B1S, B2S or CS for Special members.
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 paragraph "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.
