PSI4.3.19 - 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 effects of a pension debit can be ignored for an employee who, at the time of a pension sharing on divorce order

• is not a controlling director of the employer in relation to the scheme, or
• was not 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,

And

• does not have earnings that exceed ¼ of the permitted maximum (see Introduction 4.15b) at the date of the divorce to which the pension sharing order relates.

Example

Employee, age 50, earning £21,000 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 £7,000 (20/60x£21,000). The employee must pay contributions of 4% of salary as a condition of membership.

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 £2,800 (accrued pension of £7,000- 40%).

The pension debit does not have to be taken into account for calculating maximum approvable benefits as the employee’s salary does not exceed 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 £33,600 is £22,400 (20/30x£33,600).

If benefits continue to accrue normally without any additional contributions the employee’s projected benefit would have been £16,800 but the effect of the pension sharing order means that the benefit would be £12,600

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 (£22,400).

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 £22,400) 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 (£22,400).

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.