(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)
Section 31 of the Welfare Reform and Pensions Act 1999 also
applies to an employee’s benefit entitlement that has been
permanently reduced by a pension sharing on divorce in a money
purchase scheme. The effect of section 31 is such that the pension
debit is taken into account by way of a “once and for
all” reduction in the employee’s fund or
“pot” from which his or her benefits will be paid. As
the employee’s benefits are still subject to Revenue limits
at retirement (see
PSI20.1.13) the pension
debit needs to be valued in pension terms in a similar way to
defined benefit schemes (see
PSI6.5.95). In the case of a defined
benefit scheme the scheme actuary is able to take the pension debit
(the amount by which the cash equivalent transfer value of the
employee’s benefit rights were reduced at the time of the
divorce order) and convert it into a hypothetical deferred pension
the member could have expected to receive from the amount of the
debit by reference to the defined benefits paid by the scheme. This
is not possible in a money purchase scheme as the level of benefits
that the employee receives at retirement is not guaranteed. For
Revenue limits purposes the Government Actuary’s Department
(GAD) has produced a set of factors to convert the pension debit at
the time of the divorce into a notional deferred pension
equivalent. The factors are called “Factor 5” to
complement “Factors 1 to 4” used in the maximum
permissible funding calculations for earmarked insured money
purchase schemes and small self-administered schemes described in
Appendices XIII and IX of Practice Notes respectively. The amount
of notional pension is then revalued on the same basis as a
deferred pension in a defined benefit scheme between the date of
the divorce and the employee’s retirement.
Example
Money purchase scheme
At time of divorce - employee age 40 has 10 years service and
earns £30,000 a year
Accumulated fund or “pot” for employee which is
the cash equivalent transfer value is £80,000
Pension sharing order requires a 50% reduction of cash
equivalent transfer value = £40,000
(£40,000 is used to provide benefit rights or
“pension credit” for the employee’s ex-spouse,
see
PSI24.1.1)
Pension debit of £40,000 is converted into a notional
equivalent deferred pension using a factor for a male age 40 from
the Factor 5 table produced by GAD (£40,000/6.405) =
£6,245
At employee’s retirement - employee has 30 years
service and final remuneration of £80,000
Maximum benefit payable had there been no pension sharing is
2/3 x £80,000 = £53,333
Notional equivalent deferred pension is £13,949 –
the notional deferred pension equivalent of the pension debit
established at the time of the divorce, £6,245 is revalued
between the date of the divorce and the employee’s retirement
by the same rate of statutory revaluation that applies to a
deferred, non-GMP, defined benefit and for the purpose of this
example only the rate is taken as 4.1% a year compound
Maximum pension payable to employee is £39,384
(£53,333 - £13,949)
