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'.

Following an election for the scheme to meet the annual allowance 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 allow the scheme to meet the annual allowance tax charge.

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 (last birthday) 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 and lump sum entitlements should be calculated as shown below.

The annual allowance pension debit (D^P)should be calculated as:

D^P = TC / (F^P_x + 3 x F^LS_x)

where:

TC is the annual allowance tax charge payable by the scheme administrator

F^P_x is the factor for tax charge on pension for a member aged x

F^LS_x is the factor for tax charge on automatic lump sum for a member aged x. This is equal to 0 for debits to be deducted from NPA 65 benefits.

The factors are set out in Table 801 (Table 601 in the Consolidated Factors Workbook) for members with NPA 60 benefits and Table 811 (Table 602 in the Consolidated Factors Workbook) for members with NPA 65 benefits.

Factors should be selected according to a member's normal pension age (NPA) and their age (last birthday) at the implementation date.

Where applicable, i.e. for debits to be deducted from NPA 60 benefits, the annual allowance lump sum debit (D^LS) is calculated as:

D^LS = 3 x D^P

Teachers' Pensions 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.

Guidance for implementing debits at retirement for members retiring early or late in normal health can now be found in the latest version of the early and late retirement guidance notes.

The annual allowance pension debit and the annual allowance lump sum debit will be increased in line with the Pensions (Increase) Act up until the member's retirement.

On ill health retirement, each pension debit must be adjusted as follows:

AdjD^P= D^P x PI x F^R_x

Where:

D^P is the annual allowance pension debit

PI is the pension increase multiplier applying between the implementation date and the date of retirement

F^R_x is the timing adjustment factor for member retiring at age x

F^R_x is taken from Table 841 (Table 603 in the Consolidated Factors Workbook) or Table 851 (Table 604 in the Consolidated Factors Workbook) depending on the member's NPA. The factor should be selected according to a member's age (in years and completed months) at 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.

Where applicable each lump sum debit must be adjusted separately as follows:

AdjD^LS= D^LS x PI x F^R_x

Where:

D^LS is the annual allowance lump sum debit

PI is the pension increase multiplier applying between the implementation date and the date of retirement

F^R_x is the timing adjustment factor for member retiring at age x

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 pension for a lump sum should occur after the application of annual allowance debits.

For members with mixed service, the debit should be set up against the NPA 65 pension. If the annual allowance charge exceeds the value of the pension in the NPA 65 section of the scheme, a debit should be set up against the NPA 60 benefits to cover the excess.