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, consequential adjustments (annual allowance debits) 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.
The 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 member's pension and lump sum entitlements should be calculated as shown below.
The annual allowance pension debit ('AAPD') is calculated as:
AAPD = AATC / [FP + (4 x FLS)]
Where:
AATC = annual allowance tax charge payable by the scheme administrator
FP = factor for tax charge on member's pension - Table A_06 (602) from the consolidated workbook
FLS = factor for tax charge on member's lump sum - Table A_06 (602) from the consolidated workbook
The annual allowance lump sum debit ('AALSD') is calculated as:
AALSD = 4 x AAPD
Administrators should store the debits calculated above and the implementation date of these debits on the member's record. Where a member has multiple annual allowance debits, they should be recorded separately.
The annual allowance pension debit and the annual allowance lump sum debit will be increased in line with the Pensions (Increase) Act (Northern Ireland) 1971 up until the member's retirement.
The annual allowance debits are calculated assuming that the member will retire at their deferred pension age, 65. If a member retires earlier than age 65, 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 65:
Adjusted pension debit = AAPD x PI
For members retiring before age 65:
Adjusted pension debit = AAPD x PI x MEMERF
Where:
AAPD = annual allowance pension debit as calculated above
PI = pension increase uprating factor applying between the implementation date and the date of retirement
MEMERF = early retirement factor - Table B_06 (621) or C_06 (622) from the consolidated workbook
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.
Similarly, each lump sum debit must be adjusted separately as follows:
For members retiring at age 65:
Adjusted lump sum debit = AALSD x PI
For members retiring before age 65:
Adjusted lump sum debit = AALSD x PI x LSERF
Where:
AALSD = annual allowance lump sum debit as calculated above
PI = pension increase uprating factor applying between the implementation date and the date of retirement
LSERF = early retirement factor - Table D_06 (623) or E_06 (624) from the consolidated workbook
The lump sum to be implemented at retirement is the full lump sum, i.e. the lump sum before any debits, less all of the member's adjusted lump sum debits.
Any exchange of lump sum for additional pension occurs after the application of annual allowance debits.
Note that if a member:
- takes their pension early due to ill health, and
- is aged under 55 at the time their pension commences, and
- pension increases are not granted until age 55
then the case should be referred to DoJ.
