WASPI -Why some women born in the 50’s have been stung...twice!

You may have heard me on BBC Wiltshire yesterday morning talking about the Petition that is being put forward by Women Against State Pension Inequality (WASPI) for the government to help ease the financial uncertainty for women born in the 1950’s who say they have received little or no notice that the state pension age for women is being delayed by up to 6 years.

Firstly, a bit of history - back in 1908 the Government of the day set up the ‘old age pension’ aimed to help those over age 70 earning less than £2,000 a year (in today’s money).  It was generous for it’s time and was means tested.

In 1925 it morphed into becoming contribution based, i.e. you had to pay into to it to receive it, and the start point was age 65 of the youngest spouse.

Under those rules Michael Douglas would be 90 years old before he could get his old age pension (are he and Catherine Zeta Jones still married?).  This was deemed unfair, so just after the outbreak of WW2 women’s old age pension age was dropped to 60.  And there it stayed for 55 years!

In 1995 we started the process of reducing some of the discrimination between men and women.  Many ex-communist countries have opted not to reduce the discrimination as they believe women are disadvantaged by usually being the one to bring up the children.  

In 2007 the Labour government decided to increase state pension age again eventually up to age 68, just 2 years off what it was originally set at in 1908!  But it’s still not means tested...not yet anyway!

The decision was then taken that, in 2010, state pension age would start to increase and by 2020 would be complete. In 2011 this date was brought forward to 2018. 

Of course people are living longer too, so delaying state pension for everyone will save the government a lot of money.

Apparently the government wrote to those concerned, and put adverts in the press, however when pushed for evidence of this under Freedom of Information, they refused as the cost to do so would be more than £600.  No one remembers getting a letter or seeing any adverts. In 1995, only 1% of the population, 600,000 people, had internet access - remember 26K modems and the funny noises they made when they connected?

If the DWP gets mail returned, it doesn’t always try to track you down, and they freely admit that a sizeable proportion of their mail doesn’t even get opened. Can you imagine expecting to be claiming your state pension in a year or two, only to find that it’s been delayed by up to a further 6 years!  Somewhere between 300,000 - 500,000 women are affected.

Some women were delayed by the first change to 65, and then by the second change as well.  Many didn’t know about the first change and so the double whammy will have sent them into shock.

Men’s state pension age was delayed too.  But they were given over 7 year’s notice of a 1 year delay.  

Ex pensions minister, Baroness Ros Altmann, said that at least 10 year’s notice should be required to give people adequate time to make alternative arrangements.  It took them 14 years to write to those affected by this debacle, but they say there is no wiggle room to put it right.

To compound the problem, at best, many women affected have small private or company pensions as companies used to exclude women and part timers from their company schemes.  They were highly reliant on getting their state pension, and it’s been thrust beyond their grasp, twice.  They were also much more reliant on their husbands staying in work for longer than expected.

Previous Pensions Minister Steve Webb said he acted too hard and too fast.  Despite this, Baroness Altmann ruled out any help on 26 Sept 2015 even though when she was Director General of Saga in 2011 she called for a slower timetable and better information.

There was a debate, which the government refused to take part in, on 7 January 2016 and it had unanimous support from those attending.  But, as a backbench motion it had no force to make the government act and DWP & Justice Minister Shailesh Vara said there would be no change.

The second debate on 1st February 2016 was also rejected by stonewall Shailesh Vara, although she said that the women could of course claim Job Seeker’s Allowance instead.  This is worth much, much less than state pension and comes with a raft of terms and conditions designed to reduce how much you can have.  

You can understand why women affected are very unhappy!

Here’s hoping that something more positive comes from this latest petition. We know there is going to need to be a compromise but it’s likely that one party will be compromising much more than the other.

If you want to know your state pension age, click here.

Remember that, at best, basic state pension is often little more than £20 a day, so you absolutely need to provide for yourself - if you’d like to talk pensions then get in touch.

Will your pension leave you stuck in the mud or free as a bird?

If you are retiring soon you’re probably looking forward to taking advantage of the new pension freedoms, which give you more flexibility and control over your retirement savings. 

However, before you go jumping in with both feet it might be worthwhile giving some thought to the challenges that you are likely to face in arranging a secure and flexible income for retirement. 

Now that you’re no longer required to purchase a lifetime income annuity, there are a few questions to consider:

* Should I buy an annuity at all?

* If not, then how should I manage my pension pot to make sure I have enough income to cover my spending?

*And perhaps most concerning of all; am I likely to outlive my savings?

A report by Retirement Advantage, published last week highlights the compromise between having a secure income and having the flexibility of a drawdown pension. It turns out that what most people value above anything else is security and certainty of income (43%), and coming a close second was flexibility (34%). 

Unfortunately, it can be tricky to find a middle ground between the security of a guaranteed income and the flexibility of being able to access larger sums in case of unexpected circumstances.

Long lives the annuity  

While the days of the traditional annuity-for-all might be over, the certainty of a guaranteed income still makes good sense for those who value security, especially if the annuity is set to rise with inflation. Annuities are still one of the only options for insuring you against outliving your savings. 

But annuities aren’t for everyone, particularly if you’re looking for flexibility. Annuities are a one-size-fits-all deal, which won’t adapt to your changing needs. For example:

* If you are unfortunate enough to die 5 years into retirement an annuity won’t leave anything behind for your loved ones. 

* Or if after signing the contract you learn that you have an incurable disease that will reduce your life expectancy to a precious few years. In this case, your annuity won’t give you any flexibility to take extra income so that you can enjoy your final years.

Drawing on flexibility 

An alternative approach might be to self manage your retirement savings through a drawdown pension. 

The safest way to go about this would be to pick a reasonable life expectancy (say 100), invest your pension pot in line with your attitude to risk, and each year withdraw enough money to cover your expenditures ensuring that you don’t leave yourself short for the future.

The increased flexibility of being able to withdraw money as and when you need it is likely to have a wide appeal, particularly as life is uncertain and often results in unexpected costs. 

However, what is gained in flexibility is fundamentally lost in security. You can have no certainty that your pension pot won’t run out during your lifetime, particularly as the value of your pot is linked to the uncertainty of your investments. 

Additionally, tough spending decisions will need to be made at least annually because you now have the prospect of outliving your pension. 

The best of both

So is it possible to have both a secure and flexible retirement income?

One option might be to use your pension to annuitise your essential expenditure and invest the remaining amount into a drawdown pension. 

This would provide you with the security of a guaranteed income each year for the rest of your life to cover your basic needs, whilst delivering the flexibility to drawdown additional income, as you require it.  

An important decision

You will have worked hard throughout your life to ensure you have a secure income in retirement that is flexible enough to meet your changing needs. This should be a simple and straightforward affair, however as the landscape changes, challenges are likely to present themselves. 

Securing a certain and flexible retirement income is one of the most important decisions you are likely to ever make, at this important juncture in your life serious consideration should be given to how best to manage these potential pitfalls.

[1] http://newsroom.retirementadvantage.com/download/133758/rasentimentindexdec15certainty.pdf

State Pension Top-up; A Cheap Annuity?

Millions of pensioners and those approaching retirement will now have the chance to raise their state pension income by up to £25 a week with the launch of a new scheme.

From 12 October 2015 to 5 April 2017, you are able to apply to make a ‘Class 3A voluntary contribution’ to top up your State Pension by up to £25 per week.

Under the deal, you can choose to top up your weekly basic state pension by between £1 and £25 a week. 

How much you need to contribute will depend on:

* How much extra pension you want to get each week

* How old you are when you make the contribution

If you are 65 now and you want to buy an additional £1 a week for life it will cost you £890. If you want to buy the full £25 (or £1,300 a year) it will cost you £22,250.

Cheap Annuity?

The reaction to this has been generally good, with a string of experts pointing out that this is effectively a very cheap annuity. 

For example, if you had wanted an annuity that provided you with £1,300 per year, on the open market you would pay around £35,000, rather a lot more than the £22,500 that the Government are asking for.

Effectively, you’re getting an annuity rate of 6%, far better than the 3% available on the open market. 

On top of that, factor in that your spouse can inherit 50% of your State Pension on your death and it looks like a bargain, doesn't it?

Double Taxation

In many ways the scheme - known as Class 3A - looks generous, but it may not necessarily be the best way to boost your pension. 

The state pension top up is likely to be paid with money that has already been taxed, and will have tax applied a second time when taking the income from your topped up state pension. 

This is in contrast to an annuity purchased via your pension where the contributions are exempt from tax, the growth of the funds are exempt and tax is only applied when taken as an income.

All of this will reduce the net amount of income that you receive.

Payback Period 

So how long would you have to live for you to get your money back?

Lets say that you hand over the £22,250 for the extra £25 a week. 

* If you are likely to fall below the personal allowance tax threshold of £10,600 and will not pay tax on the income, it will take 17 years for the state to return to you the money that was yours anyway (£22,250/£1,300). You’ll need to live to 82 to break even.

* For those who will be basic rate taxpayers, you can expect 21 years before you break even at age 86. 

Given that the average life expectancy in the UK is 81.5 years, it may not seem like such a good deal after all. 

Other Options 

To receive the full state pension, you are required to have 30 qualifying years of national insurance contributions. 

For those who don’t, luckily you can pay to plug the gaps. Each year costs you £733.20 and will get you an extra £200 a year. 

That’s a payback of less than four years for non-taxpayers and just over four years for 20 per cent payers. That’s got to be better than 17 and 21 years with the State Pension top-up.

Alternatively, you could consider deferring your pension. Each year that you defer your pension, you will receive a 10.4% increase in your annual payment. The payback on this would equal 9.6 years, not quite as good as 4 years but certainly a lot better than 17 years! 

As always, the devil is in the detail. Despite the headline cheap annuity, it pays to consider the opportunity cost.

Pension Glossary 101: Part Two

Part two of our helpful pensions glossary covers everything from L – Z. If you haven’t had a chance to take a look at part one, click here to brush up on your pensions terms from A-J, then get to grips with the second part in this Jones Hill double bill.

Lower Earnings Limit – This is the point at which your earnings will build up the right to state pension benefits.

Member – Different from an ‘active member’ of a plan, who is actively making payments, a ‘member’ is someone who is still entitled to benefits under their pension plan.

NIC – National Insurance Contributions are deducted from the income of all employees on a scale which is linked with income levels. You need 30 years of National Insurance Contributions in order to get a full State Pension on retirement.

Open Market Option – Buying an annuity from their own pension provider is not the only option for the retired, and more often that not it’s not the best option – we can compare rates and arrangements for other insurance providers and purchase the one that suits you best.

Preserved Benefits – These are classed as the benefits a pension scheme member has already earned when they stop making payments, or when their scheme closes. They are also known as frozen benefits, and they will be paid when the individual takes their benefits.

Redirecting payments – You can change the funds that future payments are invested in by redirecting your future payments. It won’t affect any payments that have already been invested, and many providers don’t charge for this service.

SIPPs – A self-invested personal pension gives the planholder maximum flexibility and choice with regards to their investments. It is best for those who are more comfortable with investment risk and they can be more expensive to run.  SIPPs are also used for pension income drawdown contracts.  Alternatives to SIPPs are SSAS – Small Self Adminstered Schemes.  If you’re considering either, take professional, independent advice.

Tax Relief – Tax relief means that some of the money that would have been paid to HMRC will be paid into your pension plan instead, encouraging those saving for their retirement.

Upper Accrual Point – This is the maximum earnings that are used to build up the right to state pension benefits.

With-Profits Fund – If your pension plan contains this type of fund, your fund manager retains a percentage of the profits to supplement your investment earnings in the case of a bad year for returns. It helps to smooth out the instability of the stock market, but it can incur heavy penalties for those that cash in early., usually called a Market Value Reduction.

Pension Glossary 101: Part One

At Jones Hill, we know that pensions terminology can be confusing for those thinking about their retirement for the first time. We’ve put together a handy glossary of the most important terms you’ll ever need to know when it comes to understanding your pension.

Annuity – This is a type of financial contract that guarantees a fixed or variable payment of income. It can be monthly, quarterly, biannually or annually, and it can last for the life of the annuitant, called a lifetime annuity, or for a previously specified period of time, often called a term annuity or temporary annuity. Those diagnosed with health problems or other issues can qualify for what’s known as ‘enhanced annuity’, where they are entitled to receive more, and these are always lifetime annuities.

Basic State Pension – The flat rate for a State Pension is paid to everyone who has met the minimum contribution requirements for National Insurance. It currently stands at £110.15 per week for a single person, but changes come into play each year to keep the basic pension rate in line with inflation.  Bear in mind that even with the proposed new flat rate of £140 per week, this is just £20 per day – the poverty level in the UK is, apparently, £17.50 per day!

Contribution – This is an alternative term for the word ‘payment’. Your pension contributions are essentially what you or your employer have pay into your pension scheme.

Drawdown Pension – This allows you to keep your savings for retirement invested and draw an income directly from your plan, instead of buying an annuity. Drawdown pensions come with a number of stipulations, one of them being regular reviews and preferably on-going financial advice from an impartial expert.

Early Retirement – This hardly needs any explaining – it’s what we’re all aiming for! This is when someone takes their pension benefits before the ‘normal’ retirement date stated in their pension plan documentation.

FCA – This stands for the Financial Conduct Authority, and it helps to regulate the financial services in the UK. It was formed as a successor to the FSA (Financial Services Authority).

GPP – A GPP (or Group Personal Pension) is set up by an employer on behalf of their employees. All of the pension contracts are arranged by the employer, but are between the pension provider and the employee.

Higher Rate Tax – The dreaded phrase ‘higher rate tax’ is 40% for those with a taxable income above £32,010 for 2013/14 (plus their personal allowance).

The Annual Allowance

Individuals can save as much as they like towards their pensions each year, but there is a limit on the amount that will get tax relief. The maximum amount of pension savings that benefit from tax relief each year is called the annual allowance.

It includes employer contributions as well as individual and third party contributions. If the total from all sources – which is called pension input – is higher than the annual allowance then individuals may have to pay a tax charge on the excess amount.

The pension input is the increase in an individual’s pension savings over what is known as the pension input period. It is not necessarily the same as the contributions that have been made and received tax relief within the tax year.

If there is unused annual allowance from the three previous tax years then this can be carried forward to mitigate any excess pension input in the tax year in question.

The annual allowance charge is not payable in the tax year in which an individual dies and there is also no pension input for pension arrangements from which an individual becomes entitled to a serious ill health lump sum or a severe ill health pension where they are unlikely to be able to work again.

The annual allowance for tax year 2013/2014 is £50,000 as it was in 2011/2012 and 2012/2013. It reduces to £40,000 in 2014/2015 and is unlikely to increase in value before at least 2018.

The Pension Input

The pension input is made up of

• The total annual increase in the value of an individual’s defined benefit (DB) pension rights for the pension input period, and
• The contributions by or on behalf of the individual to defined contribution (DC) schemes for the pension input period.

In a DB scheme, the pension input is the difference, taking into account inflation, between the capital value of the pension an individual would have been entitled to receive at the start and end of the pension input period. Early retirement factors, contributions to added years AVCs and the value of death in service benefits can be ignored.

The opening and closing values for pension rights are calculated using a factor of 16:1.

If the DB scheme provides tax free cash in addition to the pension rather than by commutation then the amount of the tax free cash at the start and end of the pension input period is added on to the opening and closing pension values.

To take inflation into account, the opening value of the individual’s DB pension rights is increased by the annual rise in the Consumer Prices Index (CPI) to the September in the tax year before the one in which the pension input period ends, that means that the 12 month CPI increase to September 2012 is to be used to revalue the opening value of any pension input period ending in tax year 2013/2014.

Emma is a member of a final salary scheme that provides for each year of service a pension of 1/80th and an additional tax free lump sum of 3/80ths of annual pensionable salary. The scheme year and pension input period runs from 1 April to 31 March and in March 2014 Emma has completed twenty years pensionable service. Her pensionable salary increased from £42,000 to £50,000 following a promotion. Her pension input amount for the 2013/2014 tax year is:
		Input period
		Start date	End date
	Completed years of pensionable service	19	20
	Pensionable salary	£42,000	£50,000
	Accrued pension	£9975	£12,500
	Accrued pension x 16	£159,600	£200,000
	Tax free cash	£29,925	£37,500
	Opening value increased by CPI (2.2% Sept 2012)	£193,694
	Closing value		£237,500
	Pension input		£43,806

There is no pension input for deferred members of DB schemes as long as their benefits do not increase in value by more than CPI (or, if greater, in line with the scheme rules that applied at 14 October 2010) and they were deferred members for the whole of the pension input period.

Pension Transfers

Pension transfers don’t count towards the annual allowance unless they are a pension credit as a result of divorce from a non registered pension scheme.

Any contributions paid to the original scheme before the transfer are still tested against the annual allowance in the usual way.

The Pension Input Period

The pension input period does not have to match the tax year. Any pension input amounts paid after the pension input period end date but before the end of the tax year will not be tested against the annual allowance in that tax year but in the following tax year.

Individuals can have different pension input periods for different pension schemes they are a member of and there can be different pension input periods for different arrangements within the same scheme.

For a DC pension the first pension input period starts when the first contribution – no matter what the source – is made into it after 5 April 2006. Transfers in do not count and contracted out rebates did not either before they were abolished.

For a DB pension the first pension input period starts when benefits start accruing after 5 April 2006. For members before 6 April 2006, this will be 6 April 2006 and for individuals who join after 5 April 2006 this will usually be the date of joining pensionable service.

The first pension input period end date depends on whether the input period started before 6 April 2011 or not.

• If it started before 6 April 2011 it would have ended on the anniversary of the start date unless it was changed.

• If it started on or after 6 April 2011 it will end on the following 5 April unless it is changed.

• Subsequent pension input periods start the day after the end of the previous input period and last a year unless it is changed.

For example, a first pension input period that started on 29 January 2007 would normally have ended on 29 January 2008 and subsequent pension input periods will normally run from 30 January to 29 January while a first pension input period that started on 29 January 2014 would normally have ended on 5 April 2014 and subsequent pension input periods will normally run from 6 April to 5 April.

If an individual dies or takes all their benefits from an arrangement the pension input period will continue to the end date.

The pension input period end date can be changed although it depends on the type of scheme as to who can change it.

If it is a DC scheme it can be changed by either the scheme administrator or member. If it is a DB scheme it can only be changed by the scheme administrator.

When changing the end date the following rules apply

• A pension arrangement can only have one pension input period end date in a tax year.

• The new end date can only be the current date or in the future. Before 19 July 2011 it could have been changed retrospectively.

• If the first pension input end date started after 5 April 2011 the first end date is automatically the next 5 April. This can be ended sooner, or later than 5 April as long as it’s within a year of the start of the first pension input period.

• Subsequent pension input periods normally last a year but can be closed early or extended to any date in the tax year following the tax year in which the pension input period started.

DB scheme administrators generally change members’ pension input periods so that they tie in with the scheme year end date or company accounting date.

HMRC does not have to be informed about changes to pension input periods.

If an individual wants to change the pension input period end date they need to contact the scheme administrator who may need the request in writing.

If both an individual and a scheme administrator change the end date for the same pension input period then it’s the first request which determines which date applies.

Carry Forward of Unused Annual Allowance

From tax year 2011/2012 individuals can carry forward unused annual allowance from the previous three tax years to the current tax year. This allows individuals to have pension input above the annual allowance in a tax year without facing a tax charge. This can be useful for people who have an unusually high level of pension input in a tax year, for example, because of promotion or a sudden pay rise.

• Unused annual allowance can only be carried forward to the current tax year from the previous three tax years.
• This can only be done after the current year’s annual allowance has been used up.
• Unused allowance is used up starting from the earliest year available.
• The individual must have been a member of a pension scheme at some point during the tax year being used to carry forward unused allowance. This could be as an active, deferred or retired member of a scheme.
• For tax years 2008/2009 to 2010/2011 the annual allowance is deemed to be £50,000.
• Following the reduction in Annual Allowance for 2014/15, the Carry Forward entitlement for previous tax years, up to and including 2013/14, will remain at £50,000
• If there’s unused annual allowance to carry forward from a previous tax year but the annual allowance has been exceeded in a later tax year within the three year period that excess will use up some of the unused allowance from the previous tax year.

This does not apply to tax years 2009/2010 and 2010/2011 as any excess over £50,000 in those years does not use up previous years’ unused allowance. The excess is treated as zero. However, if contributions in 2010/11 or 2009/10 exceeded £50,000, no carry forward allowance is permitted.

• For DB schemes, the pension input calculation method outlined above is used for all tax years to determine whether there is any unused allowance.
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• Although carry forward is from previous tax years, it is based on pension input in the pension input periods that end in the previous and current tax years.
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Carry Forward & Tax Relief

• There is no carry forward of tax relief from previous tax years. Tax relief is only given in the tax year the pension contribution is made.
• Individual and employer contributions made to use up unused annual allowance are subject to the usual tax relief rules. Employer contributions are subject to the ‘wholly and exclusively’ test at the time they are made and tax relief on individual and third party contributions are limited to 100% of the individual’s UK relevant earnings (or £3600 if greater) in the tax year the contribution is made.

Stephen is a member of a defined benefit pension scheme and also has a SIPP which he funds from self employed earnings. He varies his contributions to the SIPP with a view to maximising them where possible as his self employed earnings change. In 2013/2014 he has made contributions in excess of the annual allowance after estimating what his pension input for the defined benefit scheme would be. The final position after confirmation of the pension input into the defined benefit scheme is:
	Tax year	Pension input	Annual allowance	Unused allowance	Cumulative carry forward available
	2008/2009	£25,000	£50,000	£25,000	N/A
	2009/2010	£62,000	£50,000	£0	N/A
	2010/2011	£30,000	£50,000	£20,000	N/A
	2011/2012	£70,000	£50,000	(£20,000)	£45,000
	2012/2013	£40,000	£50,000	£10,000	£20,000
	2013/2014	£85,000	£50,000	(£35,000)	£30,000
In 2011/2012, there was £45,000 unused allowance available. The pension input was £20,000 in excess of the annual allowance for 2011/2012 and has therefore used up £20,000 of the unused allowance from 2008/2009. The remaining £5000 unused allowance from 2008/2009 is lost for future tax years and the £20,000 unused allowance from 2010/2011 can be carried forward to 2012/2013 and if not used up to 2013/2014.In 2013/2014, there was £30,000 unused allowance available made up of £20,000 unused allowance from 2010/2011 and £10,000 from 2012/2013. The pension input was £35,000 in excess of the annual allowance for 2013/2014 and therefore uses up the £20,000 unused allowance from 2010/2011 and the £10,000 unused allowance from 2012/2013. There is still an excess of £5000 on which an annual allowance tax charge will be payable. There is no carry forward available for 2014/2015.

Information requirements

From tax year 2011/2012 scheme administrators must provide annual allowance information if individuals request it.

If an individual’s pension input to a pension scheme is greater than the annual allowance then the scheme administrator must provide details of the pension input to the scheme and the annual allowance for the tax year and each of the three previous tax years. This information must now be sent by the next 6 October following the tax year. For 2011/2012 this didn’t need to be done until 6 October 2013.

If an individual asks for annual allowance details the scheme administrator must provide it within three months, or by 6 October following the tax year if this is later.

Annual Allowance Charge

If the pension input exceeds the annual allowance and any carried forward unused allowance then there is a tax charge of up to 45% on the excess.

The amount payable depends on the rate of income tax that an individual would pay if the excess amount was included in their taxable income as the top slice of that income. The chargeable amount is

• 20% on any excess that falls into the basic rate tax band
• 40% on any excess that falls into the higher rate tax band
• 45% on any excess that falls into the additional rate tax band

Where a relief at source pension contribution, usually to a personal pension, or a gift aid payment has been made in the tax year the basic rate tax band is extended as normal.

Example

Laurent earns £150,000 and as a result of contributions he has made to his personal pension and the increase in the value of his current employer’s defined benefit arrangement he has £32,000 excess pension saving on which the annual allowance charge is due.

Laurent’s contribution to his personal pension was £20,000 gross which means his higher rate and additional rate thresholds are extended by £20,000. His additional rate threshold would therefore start at £170,000.

Adding the £32,000 excess to Laurent’s earnings means that £20,000 of the excess will fall below his additional rate threshold and therefore be subject to 40% tax and the remaining £12,000 will be in excess of the additional rate threshold and be subject to 45% tax.

Laurent’s annual allowance charge will therefore be £13,400 (£20,000@40% + £12,000@45%).

The charge payable is the same whether a contribution is paid to an occupational pension or a personal pension.

Paying the Charge

The annual allowance charge is normally paid through self assessment. If an individual who does not complete a tax return incurs a liability then they should contact their tax office. The charge is payable even if the individual is not resident in the UK.

The charge can sometimes be paid out of pension benefits. This has been allowed since tax year 2011/2012.

Pension schemes can choose to offer this but they only have to pay the charge on an individual’s behalf if:

• The charge is over £2000
• The pension input to that scheme was greater than the annual allowance, and
• The individual chooses to have the scheme meet the charge from their pension benefits.

The individual must choose to have the scheme to pay the charge by 31 July in the year following the end of the tax year the charge relates to. This means for a charge due for 2013/2014 the individual must make the decision for the scheme to pay by 31 July 2015.

The individual can only require that the scheme pays the charge on any excess over the annual allowance which occurred under the scheme.

If the scheme pays then the individual’s pension benefits are reduced.

• In DC schemes the individual’s fund value is reduced by the amount of the charge.
• In DB schemes the member’s pension rights are reduced actuarially.

Pensions in payment can also be reduced actuarially to pay the charge but GMP benefits cannot be reduced so in some cases the scheme may not be able to meet the liability.