If a member becomes liable to pay the annual allowance charge in any tax year it is possible for the administrator to pay all or part of the charge on their behalf. This is commonly known as Scheme Pays. Please follow legislation, HMRC guidance, and any other guidance issued by DoJ in determining the circumstances where the scheme can meet the tax charge.
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.
Annual allowance debits will need to be calculated in respect of each tax year in which a member elects to use Scheme Pays.
This section sets out guidance for calculating annual allowance debits which will be applied to the member's benefits.
Annual allowance debits will not be applied to the benefits payable to a future surviving spouse, civil partner or children on the member's death.
Annual allowance debits do not affect GMPs.
The member's age should be calculated as at the implementation date which is 5 April of the tax year to which the tax charge relates.
The annual allowance debits to apply to the pension entitlement should be calculated as shown below.
The annual allowance pension debit ('AAPD') is calculated as:
AAPD = AATC / FP
Where:
AATC = annual allowance tax charge payable by scheme administrator
FP = factor for tax charge on member's pension - Table A_88 (601) from the consolidated workbook.
Administrators should store the debit calculated above with the implementation date on the member's record. Where a member has multiple annual allowance debits, they should be recorded separately.
The annual allowance pension debit will be increased in line with the Pensions (Increase) Act 1971 up until the member's retirement.
The annual allowance pension debits are calculated assuming that the member will retire at their deferred pension age, 60. If a member retires at an age other than 60, either on ordinary or ill health grounds, the debits will need to be adjusted to allow for the different period over which they will be deducted.
Each pension debit must be adjusted separately as follows:
For members retiring at age 60:
Adjusted pension debit = AAPD x PI
For members retiring at a time other than age 60:
Adjusted pension debit = AAPD x PI x RTF
Where:
AAPD = annual allowance pension debit as calculated above.
PI = pension increase uprating factor applying between the implementation date and the date of retirement.
RTF = retirement timing factor depending on circumstances, see below
- For all members retiring from active service and for members retiring following a period of deferment either after age 55 or before age 55 on ill health grounds with pension increases payable immediately:
RTF = Fret
Where:
Fret = retirement timing factor at retirement age - Table B_88 (607) or C_88 (608) from the consolidated workbook. - For members retiring before age 55 following a period of deferment, in normal health or on ill health grounds, with pension increases not payable until age 55:
RTF = FDret / [FEret + (PIdol->ret x FFret)]
Where:
FDret = factor for age at retirement date from Table D1_88 (615) or D2_88 (616) from the consolidated workbook.
FEret is the factor for age at retirement date from Table E1_88 (617) or E2_88 (618) from the consolidated workbook.
FFret is the factor for age at retirement date from Table F1_88 (619) or F2_88 (620) from the consolidated workbook.
PIdol->ret = pension increase uprating factor between date of exit and the date of retirement
The pension to be implemented at retirement is the full pension, i.e. the pension before any debits, less all of the member's adjusted pension debits.
Any commutation of pension for a lump sum is calculated with reference to the member's pension entitlement after application of annual allowance debits.
