(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)
Social Security legislation, section 31 of the Welfare Reform
and Pensions Act 1999, places the obligation on schemes to reduce
the benefits of employees whose benefits from the scheme are
subject to a pension sharing on divorce order. The benefits the
employee would have expected to have received from the scheme had
there been no pension sharing on divorce order have to be reduced
by the effects of the pension debit. On the one hand the
legislation means
However, it is only that part of an employee’s benefits
that accrued up to the time of the pension sharing order that must
be reduced so the effect of the pension debit could be overcome by
increasing the rate of benefit provision after the pension sharing
order so that overall the employee’s benefits are no less
than they would have been had there been no pension sharing order.
There is no objection to this for Revenue limits purposes but only
in respect of certain employees known as “moderate
earners” (see
PSI6.5.90).
If pension debits could be ignored in respect of all
employees, particularly controlling directors, there would be an
imbalance in the amount of tax relief given to the provision of
benefits for employees who divorce and those who do not. For
example, if an employee divorced shortly before retiring on Revenue
maximum benefits, the full value of the employee’s accrued
benefits could be passed to the employee’s ex-spouse under a
pension sharing on divorce order and the amount passed to the
ex-spouse would continue to have tax relief. If the
employee’s benefits are brought back up to level they were at
before the pension sharing order there would be a doubling of the
tax relief needed to provide benefits for only the one employee.
This would, in effect, mean that a divorcing employee would gain
over an employee who did not divorce in tax relief terms.
For employees who, at the time of divorce, are (or were
within the last 10 years) controlling directors or higher earners
the pension debit must be taken into account for Revenue limits
purposes to ensure no special tax reliefs result as a consequence
of getting divorced. However, as an administrative easement, the
pension debit can be ignored for moderate earners for Revenue
limits purposes. Even before a possible pension sharing on divorce
order such employees are likely to receive benefits well below
Revenue limits so if they are able to rebuild their benefits to
anything like the pre-divorce level they will not gain any material
advantage as far as tax relief is concerned.
