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 for 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 Guaranteed Minimum Pensions (GMPs).

The member's age should be calculated as at the implementation date which is 5 April at the end 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_x^P + 3 x F_x^LS)

where:

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

F_x^P is the factor for tax charge on pension for a member aged x at their last birthday

F_x^LS is the factor for tax charge on automatic lump sum for a member aged x at their last birthday

The factors F_x^P and F_x^LS should be taken from table 1201 (table 601 in consolidated factors workbook) or 1211 (table 602 in consolidated factors workbook) depending on the member's Normal Pension Age (NPA).

The annual allowance lump sum debit (D^LS) is calculated as:

D^LS = 3 x D^P

The administrator 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 up until the member's retirement.

The annual allowance debits are calculated assuming that the member will retire at their NPA, or immediately if the member is above NPA at the implementation date. If a member retires other than at the assumed age, either on ill-health grounds or otherwise, the debits will need to be adjusted to allow for the different period over which they will be deducted.

At retirement, each pension debit must be adjusted as follows:

for members below NPA at the implementation date:

AdjD^P = D^P x PI x F_x^R

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_x^R is the timing adjustment factor for member retiring at age x

for members above NPA at the implementation date:

AdjD^P = D^P x PI x (F_x^R / F_imp^R)

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_x^R is the timing adjustment factor for member retiring at age x

F_imp^R is the timing adjustment factor for age of member at implementation date

The table from which F_x^R and F_imp^R are taken depends on the form of the member's retirement:

• Table 1221 (table 603 in consolidated factors workbook): Early Retirement (other than in ill health) - before NPA only
• Table 1241 (table 604 in consolidated factors workbook): Late Retirement - after NPA only and only for NPA60 members
• Table 1251 (table 605 in consolidated factors workbook): Ill-health retirement - before NPA only and only for NPA60 members

The factors should be selected according to the member's period until or after their NPA, and in the case of table 1221 by normal pension age. The factors should be interpolated to reflect this period to the nearest month as described below.

Where the age is not a whole number of years, the appropriate timing adjustment factor should be interpolated from the factors provided in the appropriate table using the following formula:

F^R = F^- + [S^E - S^-] x [F⁺ - F^-]

where:

F^R = the appropriate timing adjustment factor (i.e. either F_x^R or F_imp^R)

S^E = age rounded to the nearest month expressed in years (e.g. a member aged 50 and 6 months would be expressed as 50.5)

S^- = age rounded down to the nearest whole year

S⁺ = age rounded up to the nearest whole year

F^- = the appropriate timing adjustment factor for S^- age

F⁺ = the appropriate timing adjustment factor for S⁺ age

In the case of a 50 to 55 year old retiring in normal health, there is now no additional adjustment which applies as this is now included within the new NPA specific factors.

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:

for members below NPA at the implementation date:

AdjD^LS = D^LS x PI x F_x^R

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_x^R is the timing adjustment factor for member retiring at age x

for members above NPA at the implementation date:

AdjD^LS = D^LS x PI x (F_x^R / F_imp^R)

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_x^R is the timing adjustment factor for member retiring at age x

F_imp^R is the timing adjustment factor for age of member at implementation date

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.

Members retiring in normal health under age 55 can only have their debit adjusted using factors in table 1221 if the pension increases they will receive at 55 relate only to the period between early retirement and reaching age 55.

Any cases where members will also receive pension increases at age 55 in respect of a period before their retirement are not covered by this guidance. For example, this may occur if the year of reckonable service used to calculate the member's Pensionable Final Earnings (PFE) does not end on the member's last day of service, leading to accrued deferred pension increases in respect of the period between the end of the year of reckonable service used to calculate PFE and the date of early retirement.