PSI4.3.18 - Maximum Contributions: Pension Sharing on Divorce

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The amount of contributions, either contractual contributions or additional voluntary contributions, that an employee can pay into a scheme might be affected where the employee’s benefits in the scheme are reduced by a pension sharing on divorce order (see PSI3.5.4).

For an employee who

• is a controlling director of the employer in relation to the scheme, or
• was a controlling director of the employer in relation to the scheme at any time within the period of 10 years before the date of the divorce to which the pension sharing order relates, or
• has earnings that exceeded ¼ of the permitted maximum (see Introduction 4.15b) at the date of the divorce to which the pension sharing order relates

The maximum approvable total benefits that could have been paid to the employee had there been no pension sharing on divorce order must be reduced by the amount of the pension debit arising from the sharing order. Such an employee may pay contributions, perhaps in addition to any ongoing contractual contributions, to rebuild some or all of the pension debit provided

• the total contributions do not exceed 15% of the employee’s remuneration (see PSI4.1.6) and
• the contributions would not result in the employee’s reduced maximum approvable benefits being exceeded.

Example

Employee, age 50, earning £30,000 a year with 20 years service and a member of a defined benefit scheme with a 1/60th accrual rate and normal retirement date of age 60 – accrued pension in scheme at age 50 is £10,000 (20/60x£30,000). The employee must pay contributions of 4% of salary as a condition of membership. Employee also has a retained benefit pension of £1,000.

Pension sharing on divorce order requires 40% of the employee’s accrued benefit to be passed to the employee’s ex-spouse resulting in a pension debit of £4,000 (accrued pension of £10,000- 40%). The retained benefit is not subject to a pension sharing order.

The pension debit must be taken into account for calculating maximum approvable benefits as the employee’s salary exceeds ¼ of the permitted maximum. For the purpose of this example the permitted maximum is for the year 2000/01 - £91,800.

Projected maximum approvable total benefit payable at age 60 based on a projected final remuneration of £48,000 is £25,000 which is calculated as follows

If benefits continue to accrue normally without any additional contributions the employee’s projected benefit would have been £24,000 but the effect of the pension sharing order means that the benefit would be £18,000

There would be no objection to the employee paying further contributions of up to 11% of salary either on a contractual or voluntary basis to bring the projected benefit at age 60 to no more than the maximum approvable total benefit (£25,000).

If paying contributions of up to 15% of salary is not enough to bring the projected benefits back up to the desired amount (but no more than £25,000) there would be no objection to the shortfall being made up by employer contributions.

Alternatively the employee could continue to pay any contractual contributions as normal and the employer could pay whatever additional contributions are required to bring the employee’s total benefit to no more than the maximum approvable (£25,000).

More details about the calculation of maximum approvable benefits and when a pension debit must be taken into account can be found in PSI6.5.93.