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Annual allowance for pension savings

Author Image The Technical Team
25 minutes read
Last updated on 6th Apr 2018

Overview

A review of the main changes to annual allowance since its introduction on 6 April 2006, as well as common issues to consider.

Key points

  • Annual allowance rules operate separately from the tax relief rules. You need to consider both when looking at pensions saving.
  • Pension Input Periods prior to 6 April 2016 did not have to be aligned with the tax year, and did not change retrospectively.

  • Tapered Annual Allowance takes into account more than just salary and earned income

  • Carry forward relates only to unused annual allowance (it is not tax relief from earlier tax years) and does not need to be ‘claimed’.

  • A scheme member may ask their scheme to pay some, or all, of an annual allowance charge due.  The scheme must comply with the request providing certain deadlines and other criteria are met. Beware of circumstances that would allow the scheme to refuse a member request.

Background and latest

From 6 April 2006, HMRC maximum rules in force prior to A day relating to maximum contributions to personal pensions, retirement annuity contracts, free-standing AVCs and occupational pensions, were removed, including the end of the maximum funding rules for occupational schemes.

Since then there are no limits on the contributions that can be made to a pension. However, there are limits on the level of "tax-relievable" contributions that can be made.

The limits on "tax-relievable" contributions have a number of different levels.

Tax relief for pension contributions

One limitation is on the amount of tax-relievable contributions an individual can personally make towards pensions. An individual is limited to "tax-relievable" contributions of, the greater of £3,600 gross per annum, or 100% of relevant UK earnings in the tax year they pay the contribution. This is covered in detail in our Tax Relief on Member Contributions article. It is not possible to carry forward unused tax relief from any earlier tax year (carry forward relates to annual allowance which is covered separately).

Employers can also contribute to a member’s pension. Employer contributions can be claimed as a business expense and although there is not the same percentage or monetary limits as applicable to members own individual contributions, there is a "Wholly and Exclusively" limit. Full details of employer’s contributions are covered in our Tax Relief on Employer Contributions article. Third parties can also contribute to an individual’s pension arrangement, however the tax relief will only apply to the member of the pension scheme, as covered in our Tax Relief on Member Contributions article.

Annual Allowance for pension savings

Although the member may receive tax relief on their contributions and an employer may be able to claim pension contributions as a business expense, as explained in the above (and detailed in the associated articles), there is an additional limit which impacts on the tax efficiency of pension contributions which we need to consider. This limit is called the Annual Allowance (AA), and contributions above this limit may be subject to a tax charge, called the Annual Allowance Charge. The Annual Allowance charge, charges the member for any contributions (subject to AA test) made above the Annual Allowance and effectively negates the value of the tax relief previously gained on the excess contributions. NB an annual allowance charge may still apply even if no tax relief is gained, e.g. personal contributions in excess of relevant earnings, or an employer contribution that does not satisfy the wholly & exclusively rule for corporation tax relief. Please note that the member will be responsible for the Annual Allowance charge on any contributions made by an employer/third party (as well as their own contributions), if the Annual Allowance limit is breached.

For each tax year since 6 April 2016, the standard Annual Allowance is £40,000 per annum.

Before we cover the standard annual allowance rules in more detail, we must briefly mention two recent developments that may lead to your client’s annual allowance being less than £40,000 either for money purchase/ defined contribution pension savings (money purchase annual allowance) or for all pension savings (tapered annual allowance).

Money Purchase Annual Allowance

There is now a further consideration for those who have accessed their pension flexibly. In the post April 2015 world, the Annual Allowance will continue to be the primary allowance to consider, however, where flexibility has been accessed under the new flexible pension rules (trigger event) the newly introduced Money Purchase Annual Allowance (MPAA) rules will also apply. The MPAA was introduced by the Taxation of Pensions Act 2014 and is designed to discourage individuals who seek to abuse the new flexible pension rules, by introducing a lower annual allowance for Money Purchase contributions where flexibility has been accessed.

The MPAA limit is currently £4,000pa, effective from 6 April 2017 – a reduction from £10,000 which applied for tax years 2015/16 and 2016/17.

For the avoidance of doubt, the MPAA does not replace the current Annual Allowance rules but, if applicable, MPAA must be calculated alongside the normal Annual Allowance. Find out more by reading our Money Purchase Annual Allowance article.

Tapered Annual Allowance

From tax year 2016/17, a reduced annual allowance may apply to all pension savings by or on behalf of a member, depending on their level of taxable income within the tax year. You can find out more in our Tapered Annual Allowance article.

The annual allowance (whether the client has the standard allowance, a smaller tapered allowance or has triggered the MPAA) is the maximum amount of ‘pension input’ or Pension Input Amount (PIA) which may accumulate over a ‘pension input period’ (PIP) without an annual allowance charge being applied. So before we address the value of the Annual Allowance limit, we must first understand the Pension Input Period. In summary, the Pension Input Period is the time over which the contributions/benefit accrual are measured and the Pension Input Amount is the total of the contributions paid/benefits accrued within the Pension Input Period.

Since 6 April 2016 all new pension input periods are aligned with the tax year. This was achieved following the transitional arrangements implemented in the 2015/16 tax year which resulted in all pension schemes having a Pension Input Period that is aligned with the tax year (6 April to 5 April), and there is no longer the opportunity to change the PIP period. As such, from 6 April 2016 it is the contributions for money purchase schemes, or the benefit accrual for defined benefit schemes, within the relevant tax year that will be measured against the relevant Annual Allowance. This considerably simplifies the calculation of the Pension Input Amount for AA assessment.

PIP methodology needs to be understood for earlier years if carry forward of unused annual allowance from earlier years is being considered. Find out more by reading our article carry forward of unused annual allowance for pension savings.

Annual allowance

The standard annual allowance has been set at: 

  • £215,000 for the tax year 2006–07 
  • £225,000 for the tax year 2007–08 
  • £235,000 for the tax year 2008–09 
  • £245,000 for the tax year 2009–10
  • £255,000 for the tax year 2010–11 (see the Straddling Pension Input Period in our article Carry forward of unused annual allowance for pension savings)
  • £50,000 for the tax year 2011–12 to 2013–14 inclusive 
  • £40,000 for the tax year 2014/15
  • Potentially £80,000 for the tax year 2015/16. (Prior to the Summer Budget on 8 July 2015 it was anticipated that the AA for 2015/16 would be £40,000, but changes introduced as part of the transitional arrangements for the aligning of Pension Input Periods have changed this. As detailed in our article Carry forward of unused annual allowance for pension savings, the pre-alignment annual allowance is £80,000, plus any carry forward from 12/13, 13/14, 14/15, and the post alignment annual allowance is nil, but any of the unused £80,000 annual allowance from the pre-alignment period can be used, up to a maximum of £40,000, plus carry-forward if applicable).
  • £40,000 for the tax years 2016/17 to date

Where the pension input amount in the pension input period is over the Annual Allowance for that year, an Annual Allowance charge arises.

What is measured against the Annual Allowance?

What will be measured against the Annual Allowance will be dependent on the type of pension scheme.

Defined contribution (money purchase plans)

All tax relieved contributions paid by or on behalf of an individual, plus any employer contributions paid in respect of the individual.

It should be noted that personal contributions over 100% of relevant earnings do not qualify for tax relief, but they still use up Annual Allowance. However, if contributions (for pension input amounts ending in tax year 2014/15 or later) are refunded as an “Excess Contributions Lump Sum” they are excluded. Find out more from the Pensions Tax Manual.

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Annual Allowance includes any reallocation of funds held in a scheme, say a SIPP following another member’s death.

Unallocated employer contributions only get counted towards the pension input amount once they have been allocated to the individual and contracted-out rebates (which ceased as of 2016/17) paid from the Department for Work and Pensions don’t count as contributions for Annual Allowance purposes and neither do contributions that are life assurance contributions that do not qualify for tax relief.

Defined benefit or cash balance pension input periods

We’ve covered defined benefit or cash balance pension input periods for 2015/2016, in the article Carry forward of unused annual allowance for pension savings). What follows covers other years.

Increases in the capital value of pension and tax-free cash retirement benefits (excluding death in service rights) are measured against the annual allowance.

For increases to the pension rights under a DB scheme a 16:1 valuation factor is used (the factor was 10:1 prior to 6 April 2011). When calculating the pension to value, no actuarial reduction factor is to be applied, nor is the member to be treated as though in ill health.

What happens is the opening value of rights, (uprated by CPI each September), is subtracted from the closing value of rights. The difference is the pension input amount.

Example 1: calculation for a Defined Benefit pension input amount

The assumed basis for calculating a defined benefit pension input amount in this example is a 1/60th accrual scheme, and CPI of 3%

  • 15 years’ service
  • £75,000 pensionable earnings; increasing to £78,000
  • Inflation 3%
  • Money purchase AVC contributions £4,680

Step 1 – ‘Opening Value’:

(15/60 x £75,000) x 16

= £18,750 x 16

= £300,000

Step 2 – Increase ‘opening value’ by inflation:

£300,000 x (1 + 3%)

= £309,000

Step 3 – ‘Closing Value’:

(16/60 x £78,000) x 16

= £20,800 x 16

= £332,800

Step 4 – DB ‘Pension Input Amount’:

Closing Value – Opening Value

= £332,800 - £309,000

= £23,800

Step 5 – Add money purchase contributions:

£23,800 + £4,680

= £28,480

Total pension input amount = £28,480 

Example 2: calculation for a Defined Benefit pension input amount

Assumed basis for this example is 1/80th plus 3n/80th cash scheme

  • 15 years' service
  • £75,000 pensionable earnings; increasing to £78,000
  • Inflation 3%
  • Money purchase AVC contributions £4,680

Step 1 – ‘Opening Value’:

[(15/80 x £75,000) x 16]+(45/80x £75,000)

= (£14,063 x 16) + £42,188

= £267,196

Step 2 – Increase ‘opening value’ by inflation:

£267,196 x (1 + 3%)

= £275,212

Step 3 – ‘Closing Value’:

[(16/80 x £78,000) x 16] + (48/80 x £78,000)

= (£15,600 x 16) + £46,800

= £296,400

Step 4 – DB ‘Pension Input Amount’:

Closing Value – Opening Value

= £296,400 - £275,212

= £21,188

Step 5 – Add money purchase contributions:

£21,188 + £4,680

= £25,868

Total pension input amount = £25,868

The CPI measure used is the measure for the year to September in the tax year immediately preceding the tax year the pension input period ends. eg. for the 2018/19 tax year the CPI figure from September 2017 is used.

On occasion there will be a need to amend the closing value i.e. where there is a transfer, pension credit or benefits are taken. Find out more from the Pensions Tax Manual.

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There are other situations which can complicate the calculation of defined benefit inputs such as backdated pay rises, bridging pensions and non-uniform accrual rates. Find out more from the Pensions Tax Manual.

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Exemption from Annual Allowance test

Deferred members do not normally have their increase in benefits tested against the annual allowance.

There are essentially two tests.

1. Are they a deferred member?

This will essentially be factual based on the individual circumstances. If a member’s service has ceased and their benefits are no longer linked to their employment then they are deferred. Otherwise, if there is still a link between their continued employment, (ie current salary) and any pay rise increases their benefits they will likely be an active member.

Example:

Jeff leaves service after 10 years with a pensionable salary of £50,000. His benefits are revalued according to the scheme rules.

Bob ceases to accrue service after 10 years but he is still in employment and his ultimate pension will be linked to his salary at the date he takes his benefits.

Jeff is a deferred member. Bob is an active member.

2. Is the increase in benefits less than the limit?

The limit is:

  • The amount required by the scheme rules as at 14 October 2010, or
  • The increases in CPI over a 12 month period ending with a month that falls within the pension input period. (please be aware of the uprated 2.5% for 2015/16 calculations as detailed in the transitional provisions covered in our Carry forward of unused annual allowance for pension savings)

The member must pass both tests above for their pension input for that arrangement to be nil.

This is known as the deferred member "carve-out". Find out more from the Pensions Tax Manual.

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The pension input for an arrangement is also counted as nil where in a tax year an arrangement fully vests due to:

  • Death, or
  • Serious ill health i.e. life expectancy less than 12 months and member is paid a serious ill-health lump sum from the arrangement, or 
  • Severe ill health i.e. unable to perform any occupation until state pension age

From 6 April 2011 it is no longer allowed to treat the pension input as nil where the arrangement fully vests for any other reason.

Information requirements

Prior to 6 April 2011 the onus on administering the annual allowance was solely on the individual. They had to keep track of the inputs for all arrangements under all schemes and self-assess any charge.

This position is essentially the same post 5 April 2011. However, there are a number of information requirements which were introduced, broadly:

  • Information that must be given automatically to the member
  • Information the member has a right to ask for and receive
  • Other information requirements

Information that must be given automatically to the member

These are known as pension savings statements and they must automatically be supplied to a member where:

  • They are an active member of the scheme, and
  • Total inputs to all arrangements within a scheme in a tax year are in excess of the standard annual allowance for that year

There is no set format for these statements and if they want to scheme administrators could send the information every year to all members as standard.

The information must be supplied by the 6 October after the end of the relevant tax year but for the first tax year i.e. 2011/12 there was an extension of a year making the deadline for both 2011/12 and 2012/13, 6 October 2013.

If the scheme administrator needs information from a 3rd party and it is not received to meet the deadline they have 3 months from when any information is received.

From the tax year 2015-16 onwards the information included in a pensions savings statement depends on:

  • Did the scheme administrator have reason to believe that the member had flexibly accessed their pension rights, and
  • Were the member’s money purchase pension inputs under the scheme worth more than £4,000? (for 2015/16 and 2016/17 this limit was £10,000)

If the answer to either of these questions is “no” then the scheme administrator should issue a standard pension savings statement.

For tax years 2016/17 onwards the standard pension savings statement must contain all the following information:

  • The total of the pension input amounts for the member for all their arrangements under the scheme for the relevant tax year.
  • The amount of the standard annual allowance for the tax year concerned.
  • The total of the pension input amounts for the member for all their arrangements under the scheme for the previous three tax years.
  • The amount of the standard annual allowance for the previous three tax years.
  • For the 2015-16 tax year the pre-alignment and post-alignment input amounts must be provided separately where appropriate.

If the answer to the above two questions is ‘yes’ then the scheme administrator should issue a money purchase pension savings statement. Further details of the money purchase pension savings statement are available from the Pension Tax Manual.

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Information the member has a right to ask for and receive

A member or former member of a scheme is entitled to ask the scheme administrator for information on their pension input amounts in their scheme.

The information that can be asked for is the same information as would be supplied on a pension savings statement.

The information must be supplied within the same timescales as a mandatory statement:

  • Within 3 months of the request, or
  • 6 October following the end of the relevant tax year if later

Reg 14A & 14B The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

Other information requirements

On occasion a scheme administrator will require information from another party in order to supply a pension savings statement e.g. the scheme administrator may need up to date salaries from an employer to work out defined benefit increases.

There are further information requirements for these requests, which you can read about in the Pensions Tax Manual.

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Annual Allowance tax charge

At the end of every tax year, the member must calculate the aggregate pension input amount for all of their pension arrangements and compare this total to the Annual Allowance for that tax year – this will also include any available carry forward where eligible.

The annual allowance charge is a percentage, levied on the pension input amount that exceeds the available Annual Allowance. The liability for this charge rests with the member.  The member notifies via the self-assessment tax process even if scheme pays applies (explained below). If scheme pays does not apply then the charge is collected via self-assessment. Although the charge is to income tax, the amount is not income for tax purposes and therefore the member cannot set any allowances, losses or relief against it.

It should also be noted that the full amount of relievable pension contributions should be included in the tax return not just the amount of contributions up to the annual allowance.

As explained before, tax relief on contributions works the same way as it always has done, independent of the fact there is an annual allowance. Whilst related, the two topics are essentially separate for taxation purposes.

Amount of charge

The amount of the charge depends on the member's taxable income, or reduced net income in HMRC terms and whether they are subject to Scottish Rates of Income Tax or UK rates.

Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension).

Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. For the 2018/2019 the rates and bands of tax relief now have significant differences to the UK rules.  This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. Our Tax Relief Modeller can assist with calculations under both UK and SRIT tax regimes. For more info on SRIT and how this works in practice, please visit our facts page.

In simple terms, the amount of the annual allowance excess is treated like any other income and is added to the top part of the person’s taxable income.

Based on rest of UK rates, the part of the excess that falls:

  • Below or within the basic rate band is taxed at 20%
  • Within the higher rate band is taxed at 40%
  • In excess of the additional rate threshold is taxed at 45%

Where a relief at source pension contribution or a gift aid payment has been made in the tax year the bands extend as they normally would. Find out more in the Tax relief on member’s contributions article and in the calculation section of the Income Tax Act 2007, Part 2, Chapter 3, Section 23.

Example:

Roy has earned income of £100,000 in the current tax year. He makes a pension contribution of £20,000 gross to a scheme that operates relief at source. He has a non-contributory defined benefit scheme which used up all of his annual allowance for the current tax year and has no unused allowance from previous tax years to carry forward to support his contribution. Therefore the full £20,000 is excess.

He is a UK tax  payer, therefore, his contribution extends his basic rate band meaning he paid 20% tax on £20,000 of his income instead of 40%; a saving of £4,000. He also received £4,000 tax relief at source on this contribution. The aim of the annual allowance charge is to remove the tax relief obtained as a result of the excess contribution. The £20,000 excess is therefore added to the top part of his income and as this all falls within the higher rate bracket the annual allowance tax due is £20,000 x 40% = £8,000. The charge would be the same amount even if this was fully in respect of an employer contribution paid on behalf of this member.

The taxation is the same whether a contribution is paid to a net pay or a RAS arrangement. HMRC provides an example, incorporating the interaction with personal allowance, in the Pensions Tax Manual.

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Dealing with the charge

As stated before it is the responsibility of the individual concerned to self-assess any annual allowance charge.

The full amount of contributions is included on the main form as normal. See the top of page 4 of the tax return form SA100.

Any annual allowance excess is included on the additional form SA101 on the last page.

This applies even where the member’s scheme pays the charge by reducing their pension benefits under ‘scheme pays’.

HMRC have various help sheets for dealing with all aspects of self-assessment including help sheets on pensions tax charges.

Scheme Pays

When the Annual Allowance changes were made in April 2011 it became apparent that more people would be affected by an Annual Allowance charge.

As a result of this two main actions were taken, the introduction of Carry Forward described in our article Carry forward of unused annual allowance for pension savings and the possibility for people with a charge to pay it from their pension benefits.

Normally, the individual concerned notifies and pays the annual allowance charge through their self-assessment. However, from 11 August 2011 the ability to pay a charge from pension benefits began and is known as ‘scheme pays’.

Mandatory or a voluntary basis

Where certain conditions are met then the member can give notice to their scheme administrator that they want them to pay some or all of their annual allowance charge from their pension benefits.

The member can require the scheme to pay some or all of their charge where:

  • Their total annual allowance charge is over £2,000, and
  • They have inputs in excess of the standard annual allowance in the scheme

Example:

Jeff pays £50,000 into his scheme and this creates an annual allowance excess of £10,000. The resulting tax charge was £4,000. He can ask his scheme administrator to pay all of this charge.

The scheme administrator can only be liable for that part of the excess that arose in their scheme.

Example:

Jeff pays £45,000 into scheme 1 and £5,000 into scheme 2 and this creates an annual allowance excess of £10,000. Based on UK rates of income tax, the resulting tax charge was £4,250 as £5,000 of the excess fell in the 40% tax band and the remainder was in the 45% tax band.

He can require scheme 1 to pay some of his charge but not all of his charge as not all of the excess relates to the inputs in scheme 1.

Intuitively, as half the excess occurs in scheme 1 it would be reasonable to assume they can only be asked to pay half the tax charge but this isn't correct. As the £5,000 excess is in the 45% band they can ask the scheme to pay £2,250.

Scheme 2 cannot be required to pay any of the charge as the annual allowance was not breached in their scheme.

Where there is no mandatory requirement it is still possible for a scheme to pay some or all of an annual allowance charge whether their scheme caused an excess or not. This essentially works in the same way as mandatory scheme pays but the fundamental difference is that the individual remains solely liable for the charge so if the scheme does not pay, or pays late, the member will still have to pay for any interest or penalties etc. The scheme should pay the tax charge based on the member’s self-assessment deadlines see more details on Self- Assessment tax returns.

Scheme Pays where the Tapered Annual Allowance or MPAA apply

The rules here are slightly more complex.  The scheme can only be required to pay an annual allowance charge in respect of the member’s pension savings made within the scheme which exceed the standard annual allowance (ie £40,000 for the current tax year), and for MPAA only in respect of the amount of the charge which relates to pension saving in excess of the standard AA.  Let’s simplify with an example –

An additional rate taxpaying client has pension inputs of £42,000 into a single pension scheme.  If the client is subject to a tapered annual allowance of £10,000, the tax charge is £32,000 x 45% = £14,400.  As this figure is over £2,000, it meets the conditions for ‘mandatory scheme pays’ and the scheme can be forced to pay some of the charge.

If the client is subject to the money purchase annual allowance, however, the outcome is different.  Although the client’s tax charge is (42,000 – 4,000) 38,000 x 45% = £17,100, the rules mean we have to work out the amount of charge based on the standard annual allowance of £40,000 (£2,000 x 45% = £900.)  As the tax charge is less than £2,000, then no ‘mandatory scheme pays’ notice can be raised.

Of course, in either case, the scheme may still offer to pay the client’s tax charge on a voluntary basis.

Notifying the scheme administrator

There is a deadline for notifying a scheme that they are to pay an annual allowance charge.

A few critical points:

  • it must be from the member
  • the deadline is when the scheme receives the notice NOT the date it is sent
  • the notice must be signed, dated and in writing
  • online submissions are allowable as long as the member confirms they personally submitted the notice
  • once notice has been given it cannot be withdrawn or revoked unless it was not valid in the first place

The deadline for notices is:

  • the 31st July in the year following the end of the tax year to which the notice relates eg. 31/07/2019 in respect of 2017/18

There are circumstances where the deadline is earlier:

  • if they are taking benefits from the scheme in the tax year the charge relates to it must be notified prior to their entitlement arising
  • if they are 75 in the tax year the charge relates to they must give notice prior to their 75th birthday

Form of notice

There is specific information, laid out in regulations, that is required to be on the notice and also additional information that is required where the election is made in a year that benefits are taken.

Full details are available in the Pensions Tax Manual.

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Notices can be amended up to 3 years after the deadline for the original notice i.e. 31st July, 4 years after the relevant tax year. This could be because an estimate was previously used.

All the same information has to be supplied as the original notice as well as information on the tax year to which the annual allowance charge liability relates, the new amount and confirmation the amount is calculated at the ‘proper rate’.

If an amended notice results in an amount of tax less than £2,000 then the scheme can refuse to pay any of the liability as it would no longer meet the mandatory requirements.

Situations where the scheme does not need to pay the charge or can be discharged from liability

Even though the conditions for mandatory scheme pays are met the scheme administrator can still be discharged from having to pay any annual allowance charge if certain conditions are met.

These conditions are:

  • The scheme is being assessed by the Pension Protection Fund when the declaration is made or enters the assessment period post declaration but pre paying the charge
  • The scheme can't adjust benefits if they relate partly or wholly to GMP (or protected rights prior to them being abolished). However, this does not apply to s9(2b) rights
  • All the scheme members have been transferred to another scheme in bulk

The scheme can apply to HMRC to be discharged from their liability in limited circumstances, being:

  • It would harm other members of the scheme
  • It would not be reasonable to do so e.g. the member no longer has the necessary funds available

If HMRC grant the discharge then the member becomes solely liable.

Consequential adjustment to benefits

As a consequence of having a scheme pay the charge they must reduce the member's benefits under the scheme.

The adjustment depends on the scheme type:

Money Purchase

A simple removal of the amount from the fund would take place.

Defined Benefit or Cash Balance

The amount of benefits accrued would be reduced.

Where there is more than one arrangement under a scheme then it is entirely possible to pay the charge from any arrangement of any type, not necessarily the arrangement(s) from which the excess arose.

Legislation has been laid so that benefits that are adjusted according to tax law are:

  • Exempt from the inalienability and forfeiture provisions of Pension Act 1995
  • Allowable even where a schemes rules prevent it without the need for the scheme to amend their rules

There are no rules on how the benefits in schemes are adjusted. It is up to the scheme to decide but they need to be ‘just and reasonable giving regard to normal actuarial practice’.

If the adjustment is not deemed to be "just and reasonable" then the payment of the charge would be an unauthorised payment.

Other points to note are:

  • It is member benefits that are to be adjusted and no one else's however, in some cases this could have a knock on effect on dependants benefits e.g. where spouses pension is a percentage of the members pensions or where the death benefits are dependent on fund value in a money purchase scheme.
  • If death benefits become due before the charge can be paid then it cannot be paid as only member benefits can be reduced

Effect on death benefits and dependants’ benefits

HMRC give the following example of how benefits could be adjusted:

  • Member's pension before any reduction £10,000 p.a.
  • 50% spouses pension on death i.e. £5,000 p.a.

An example of an actuarially justified ‘just and reasonable’ adjustment might be:

  • Member's pension £8,750 p.a., spouses £5,000 p.a. or
  • Member's pension £9,000 p.a., spouse's pension £4,500 p.a.

Reduction of future lump sum death benefits would not be allowable.

There are no rules on the timing of the adjustment it is entirely up to the scheme administrator to decide when the reduction is made.

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