One option that DB pension administrators use is a separate negative account – essentially a loan to the member to pay the tax charge. A notional record of the amount and any interest accrued is recorded against the member, and when they come to take benefits it is clawed back. This could be through a reduction in the pension payable by commuting the notional value into a pension, or by reducing the pension commencement lump sum or any additional voluntary contributions the client had built up.
It is important to understand how this works on a scheme-by-scheme basis in order to determine whether it will prove good value for the client to proceed down this path. It may be better value to pay the tax charge from external funds.
In the case of the negative account, scheme rules may require that amount is paid back if the member leaves the scheme. At that point in time, the notional value will be commuted to a pension value, and that value would then be deducted before the scheme is deemed deferred.
Alternatively, the scheme may apply a reduction to benefits immediately by way of commutation. This is likely to take into account the client’s age and term to retirement so as not to disadvantage other members. Tables from the pension scheme may be available to ascertain the reduction, otherwise the commutation rates may only be determined by the actuary when requested.
More options for members
Scheme pays has come closer to the forefront of administrators and advisers’ minds in recent years, mainly due to the tapered annual allowance. As a result, more schemes seem to be offering voluntary scheme pays to their members, most notably the NHS Pension Scheme.
It should be noted that scheme pays isn’t always the most efficient way to pay the tax charge; this will depend on the scheme rules and how they deal with recouping the funds used to pay the charge. But it does generally mean there are options available to scheme members to avoid having to find thousands of pounds of their own money to pay the charge.
Hopefully we will see more administrators and schemes offering good-value scheme pays to their members, otherwise we will see increased numbers opting out of very good and valuable pension schemes. In many cases, it is still better to remain a member of the scheme and pay the tax charge than to opt out and not receive the benefit of the employer contributions and guaranteed income in retirement.
If I were a member of a DB pension scheme and subject to annual allowance charges, it is safe to say I would be ensuring I considered all options and their implications before opting to leave a scheme that would provide me with some certainty in retirement.
