An issue with “Scheme Pays” notice deadlines?

I sometimes find that, when the Government starts introducing changes to existing pensions legislation, this not only causes Aries members to consider the proposed changes, but also to look back at the existing legislation and see this is a slightly new light.

So it proved recently with the changes being introduced in connection with the mandatory “Scheme Pays” process – the process under which a member can require a pension scheme to pay some or all of their Annual Allowance charge.

As I am sure you are aware, Section 9 of the Finance Act 2022 introduces an extension for the deadline for a member to provide a “Scheme Pays” notice to the scheme, in cases where the scheme has had to provide the member with an amended Pension Savings Statement (amending the member’s Pension Input Amount for a tax year) as a result of “additional” information being provided to the scheme by the member’s employer. Supporting?draft Regulations concerning the provision of “additional” information by the employer and the requirements for schemes to provide amended Pension Savings Statements are currently out for a technical consultation and are intended to come into force from 6 April 2022.

All of this caused one Aries member to look back at the existing “Scheme Pays” notice deadlines and identify an apparent issue with the requirements.?Under Section 237B (6) of the Finance Act 2004 (which is not changed by the Finance Act 2022 amendments):

A [“Scheme Pays”] notice may not be given after the individual becomes actually entitled to all of the individual's benefits under the pension scheme or benefit crystallisation event 5, 5A or 5B occurs in relation to the individual and the pension scheme.

?The very practical issue my enquirer identified was as follows.

Where a member is retiring and taking all of their benefits part-way through a tax year, if they want to adopt “Scheme Pays” in respect of that tax year, they will have to provide the scheme with a “Scheme Pays” notice before they take their benefits.?The notice must confirm, amongst other things, the amount of the Annual Allowance charge that the member is requiring the scheme to pay on their behalf for the tax year (also see the PTM).

As the member may not actually know what their Pension Input Amount under the scheme will be for the tax year - and may not even know what their marginal rate of income tax will be (which directly impacts on their Annual Allowance charge for the tax year) - how can they possibly provide the scheme with a “Scheme Pays” notice confirming the amount of the Annual Allowance charge that the scheme must pay?

As I have touched on, this is not a new problem – it has been sitting there in the legislation since “Scheme Pays” was introduced with effect from the 2011/12 tax year.?I was, however, able to confirm to my enquirer that the answer to the question has also been sitting there, albeit tucked away in a rather dusty corner of the PTM.?As the PTM explains:

If the member does not have the information available to calculate the exact amount of their annual allowance charge then they can estimate this. For example, the member might not be certain of the exact amount where part of the tax charge may be at 45 per cent (or, for 2011-12 and 2012-13, 50 per cent) as it is uncertain how much of their income would be liable at the additional rate of tax.

…

Where a member has estimated the amount of annual allowance charge due, they can complete their notice to the scheme administrator using estimated figures. In these circumstances, where the member has made a reasonable estimate of the tax charge due then this is acceptable and HMRC would consider that the conditions asked for in the [“Scheme Pays”] notice are met.

In effect, then, the member can submit an estimated “Scheme Pays” notice before the deadline, to invoke the “Scheme Pays” process. As the estimated figures may well be wrong, however, the member might subsequently submit an amended notice once the precise figures are known.

Dealing with amended “Scheme Pays” notices can, of course, raise an entirely new set of issues, particularly where the member is increasing the amount that they are requiring the scheme to pay.?For example, what if all of the member’s benefits have already been secured by way of a lifetime annuity??Although these issues are outside the scope of this article, they are considered in the PTM.

You may also be interested in an earlier article I wrote on other aspects of “Scheme Pays”.

Aries Insight?provides comprehensive and detailed guidance on the application of the “scheme Pays” requirements, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.?If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.