Scheme Pays Election Calculator
Frequently Asked Questions
What is Scheme Pays and when can I use it?
Scheme Pays allows your pension scheme to pay your annual allowance charge to HMRC on your behalf. In exchange the scheme reduces your pension entitlement. Mandatory Scheme Pays applies when the annual allowance charge exceeds £2,000 and the excess pension input in that scheme also exceeds £2,000. You must notify your scheme by 31 July following the tax year (e.g., 31 July 2025 for 2024/25).
How does Scheme Pays affect my defined benefit pension?
For defined benefit (final salary) schemes the actuarial deduction is applied when you retire. The scheme calculates a reduction to your annual pension based on the charge amount, your age, and actuarial factors. A typical reduction might be £1 per year of pension for every £15–£20 of charge paid, but this varies by scheme. The DB section of this calculator estimates your total lifetime cost using your expected annual pension reduction.
How does Scheme Pays affect a defined contribution pension?
For DC (money purchase) schemes Scheme Pays simply reduces your pension fund by the charge amount plus any notional interest (the scheme may charge a small administrative fee). The impact is straightforward: your pot is smaller by exactly the charge amount, which reduces future investment growth and ultimately your drawdown income or annuity.
Is it better to pay the annual allowance charge myself or use Scheme Pays?
If you have surplus cash it is often cheaper to pay the charge yourself. Scheme Pays preserves your cash today but reduces your pension, which is usually worth more over a long retirement. The break-even point depends on your age, investment returns, and pension income reduction. Use this calculator to find your personal break-even age — if you expect to live beyond it, paying yourself is likely better value.
Can I use voluntary Scheme Pays if my charge is under £2,000?
Many pension schemes offer voluntary Scheme Pays even when the mandatory threshold is not met. The rules vary by scheme — check your scheme rules or contact your scheme administrator. The same actuarial reduction methodology applies as for mandatory Scheme Pays.