Scheme Pays
Benefits in excess of the Annual Allowance (“Scheme Pays”)
Background
The Annual Allowance (AA) is the maximum amount of pension saving that you can have in a Pension Input Period*(PIP) that benefits from tax relief. This includes any pension savings that you make plus any made on your behalf by the Company.
Under the legislation, pension savings are called pension input amounts. More information about calculating your pension input amount can be found here.
On 6 April 2011 the AA reduced from £255,000 to £50,000. As a result, if your total pension input amount - across any registered pension arrangement you are a member of - exceeds the AA you may be subject to an AA tax charge.
You can carry forward any unused AA (based on the new £50,000 limit) from the previous three PIPs to increase your AA and effectively reduce or eliminate any AA tax charge. More details about this can be found here.
From 2012, IBM Pensions will send you an AA statement each year. This statement will show the value of your pension input amount for the latest PIP and the three previous PIPs so you can check if you have exceeded the AA. The pension input amount will be the total from the IBM Pension Plan and/or the IBM IT Solutions Pension (“the Plans”) and will include any additional contributions you have made. Any external savings (including those from the IBM UK Personal Pension Plan) will not be included in your statement.
* The PIP for the IBM Pension Plan and the IT Solutions Pension Scheme is from 6 April to the following 5 April.
Notifying HM Revenue & Customs
You will need to notify HM Revenue & Customs (HMRC) if your pension input amount exceeds the AA (taking account of any unused amounts carried forward from the three previous PIPs) as you will be liable to pay an AA tax charge.
You should include your pension input amount and AA tax liability on your Self Assessment tax return. If you submit paper returns, you will need to ask for the additional information pages (SA101).
The AA tax charge is not calculated using a fixed rate but will depend on how much taxable income you have and the amount that your total pension input amount exceeds the AA.
To find out how much you will pay, you will need to work out the rate or rates of tax that would be charged if your excess pension input amount was added to your taxable income. More information about this can be found on HMRC’s guidance notes: http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM06108100.htm
The amount of AA tax charge will be included in your tax calculation. You would normally have to pay the charge in the usual Self Assessment payment deadlines. However, you may get the choice of exercising ‘Scheme Pays’.
‘Scheme Pays’
If your AA tax charge exceeds £2,000, you have the option to ask IBM Pensions (the administrator of the plans) to arrange payment of the AA tax charge on your behalf from your relevant plan benefits. This is known as ‘Scheme Pays’.
The AA tax charge will be paid by IBM Pensions in return for a reduction in your pension benefits –see Reduction in Benefits below.
The maximum amount you can request IBM Pensions to pay is based on the amount of your pension input amount that exceeds the AA (this will be shown on your AA statement). If you have benefits in any other arrangements that are subject to an AA tax charge these cannot be taken from the IBM Pension Plan and/or IT Solutions Pension Scheme.
Your election for 'Scheme Pays' does not have to be the total amount that you are required to pay. You can make an election requiring IBM Pensions to pay some of the AA tax charge and you would then pay the difference direct to HMRC; or you could pay all of your liability direct to HMRC. If you decide to pay all your liability direct to HMRC you do not have to tell IBM Pensions.
Reduction in Benefits
If you elect ’Scheme Pays’, the reduction in your pension benefits will depend on whether your benefits are Defined Benefit (DB) and/or Defined Contribution (DC).
Reduction of DC fund(s)
If you have a DC fund (benefits under the M Plan and/or AVCs/ASCs) the AA tax charge will be taken from these funds on the date of payment to HMRC. Your DC fund is made up of units invested in one or more of a range of funds and some of these units will be sold to pay the AA tax charge. If have more than one fund, you will be given the option of which fund you wish to sell your units from.
DC Negative Account
If you do not have a DC fund or it doesn’t cover your AA tax charge, your benefits will be reduced by using a ‘DC negative account’ approach. A DC negative account will be set up at the time the AA tax charge is paid to HMRC. A separate account will be set up for each year that you request ‘Scheme Pays’.
The DC account will roll-up each year until you retire in line with the plan’s expected investment returns.
When you retire, your benefits will be reduced by the value of each DC account, and will be calculated by using the plan’s commutation factors. This will not reduce any dependant’s pensions that become due in the event of your death after retirement.
Implementation
You must notify HMRC of your intention to use ‘Scheme Pays’ for the relevant PIP by 31 January and make an irrevocable election to IBM Pensions before 31 July. Both of these deadlines are in the year following the relevant PIP. An election cannot be revoked although it can be amended.
For the 2011/12 PIP the 31 July 2013 deadline has been extended to 31 December 2013.
Charges
IBM Pensions will not charge an administration fee if you elect ‘Scheme Pays’.
AA Tax charge in the year of retirement
If you accrue an AA tax charge of over £2,000 within the PIP in which you retire, you can elect for “Scheme Pays” in respect of this charge. To do this, you must notify IBM Pensions before you retire as the AA tax charge will be taken from your retirement benefits.
Last Updated: 18/01/2012
