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 the 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 will be calculated based on the member's State Pension Age (SPA) under stated Government policy at the implementation date. The age at which debits become payable will be the member's SPA according to stated Government policy at the time that the member retires. For the avoidance of doubt, no adjustment will be required to the amount of pension debit following any changes to the member's SPA under stated Government policy.
The annual allowance debits to apply to the member's 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 the scheme administrator
FP = factor for tax charge on member's pension from Table A_15_65, A_15_66, A_15_67 or A_15_68
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 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 SPA (as described above). If a member retires earlier than their SPA, 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 SPA:
Adjusted pension debit = AAPD x PI
For members retiring before SPA:
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 from Table B_15 or C_15.
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.
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.
