On 3 March 2011, the Government published its response ("the Response") to its consultation on how the "scheme pays" facility for meeting high annual charges from pensions benefits will work in practice. It also made available draft legislation in relation to Scheme Pays, on which it has now received comments. Draft legislation relating to Scheme Pays is now set out at Schedule 17 to the Finance Bill 2011 and includes some important changes from the draft published on 3 March. The key points to note about the Scheme Pays design are:
- Scheme Pays applies to defined benefit schemes as well as defined contribution. It will be mandatory for schemes to offer the facility;
- Individuals who have an annual allowance charge of £2,000 or more will be able to have that charge paid from their pension scheme in exchange for an actuarial reduction to their scheme benefits. In the version published in the Finance Bill, the Treasury has been given regulatory powers to increase the level of the £2,000 eligibility threshold in future years;
- The tax will be paid at the point the charge arises.
- Scheme Pays will apply for the first time to charges incurred during 2011-12. Individuals will have until 31 January 2013 Self Assessment filing and payment deadline to decide whether to manage their tax affairs in this way.
- Members can choose to meet either the full value of the charge from the pension benefits or a portion of the charge (provided the amount to be paid is over £2,000).
- Schemes must not charge for offering the facility.
- DB schemes will have flexibility around how they offset annual allowance charges through reductions to pension benefits. It is for scheme trustees, drawing on actuarial advice, to ensure that any offsetting adjustment made to benefits delivers a "just and reasonable" outcome to that individual and to other scheme members. The draft legislation does not currently state who is to determine the adjustment.
- Under the draft clauses published in the Finance Bill, it seems that schemes will be given a power to override their rules in order to provide the Scheme Pays facility. The draft legislation now includes a power for appropriate regulations to be made for schemes to be given such a power. The version in the Finance Bill also includes provisions to limit the amount of charge paid by the scheme so as not to reduce a member's benefits below their statutory Guaranteed Minimum Pension.
- DC schemes will be expected to pay only to the extent that the member has enough in his money purchase "pot" to pay the charge.
- Schemes which enter a PPF assessment period will be exempt. Otherwise, schemes may only be exempted from the requirements where they can demonstrate to HMRC that it would detrimentally affect the overall health of the scheme to a substantial extent to offer the facility.
The draft clauses published in the Finance Bill include some welcome changes from the draft published on 3 March, most notably a power for regulations to be made to give schemes a power to override their rules in order to make the facility available.