RPSM06109080 - Technical Pages: Annual allowance: April 2011: Paying the tax charge: Scheme pays a member’s annual allowance charge - Paying the annual allowance charge in the year that benefits are taken

Paying the annual allowance charge in the year that the member takes their benefits

Timing of notification

If a member is planning to take all of their benefits under a pension scheme in a particular year and they also want their scheme to pay an annual allowance charge in the year that they are taking their benefits then they will need to give the scheme notice of this before they become entitled to their benefits.

The member’s notification will need to include a statement to explain that before the end of the tax year, they intend to take all of their benefits from the pension scheme and they must give the date when they expect to take their benefits.

This will forewarn the pension scheme that the member may, for example, take their benefits from the scheme before the scheme may have paid the tax that the member has asked it to pay.

This will allow the pension scheme to consider whether the reduction to the member’s benefits to take account of the tax to be paid can be made before the member becomes entitled to their benefits so that no reduction would need to be made once the member’s benefits have come into payment.

Making an adjustment to the member’s benefits

Even though the member is taking their benefits in the same year that the scheme will become liable for the annual allowance charge, the scheme is still required to make an adjustment to the member’s benefits to reflect the tax paid. If the scheme does not do this before a member’s pension is put into payment then the reduction of a pension already in payment otherwise than in exempted circumstances could lead to the future pension payments being unauthorised member payments. (See RPSM09101580 for further information.)

Where a member has asked the scheme administrator to pay their annual allowance charge in the year that they are taking all of their benefits from the scheme and the scheme administrator will do this (either because they have become jointly and severally liable to the charge with the member or because they have agreed to pay the charge on a voluntary basis) then when they are calculating the members final pension input amount they will not need to make an adjustment to the closing value. See RPSM06107040.