PSI8.1.48 - Lump Sum Benefits and Commutation: Maximum Lump Sum Benefits – Pension Sharing on Divorce – Pre and Post Finance (No 2) Act 1987 Members with Lump Sums by Commutation of Pension

(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 lump sum limits that apply to employees whose benefits are permanently reduced by a pension sharing on divorce order and the pension debit needs to be taken into account of Revenue limits purposes (see PSI8.1.44) are different to the limits that apply to other employees. The limit recognizes that an employee’s lump sum entitlement could be shared as part of the pension sharing on divorce process and it is devised in such a way to ensure that the total lump sum payable to both the divorced employee and the ex-spouse remains broadly within normal tax approval limits. The limit has also be devised so that it is relatively straight forward to administer through discretionary approval practice (see PSI2.3.13) and the overriding legislation for pension sharing on divorce in Schedule 10, Finance Act 1999 (see Introduction 4.18).

For employees who are Finance (No 2) Act 1987 members or have continued rights to Finance (No 2) Act 1987 membership or who are Finance Act 1989 members (see PSI2.3.22-23) the maximum approvable commutable lump sum cannot exceed 2.25 x the initial pension payable to the employee which has been reduced by the pension debit (see PSI6.5.93-94). This follows the general principle for Finance (No 2) Act 1987 members and Finance Act 1989 members generally that the maximum lump sum is likely to be determined by reference to the initial pension payable (see PSI8.1.24 and PSI8.1.25 respectively) rather than by reference to the basic 3N/80ths accrual rate (see PSI8.1.21).

For employees who are pre Finance (No 2) Act 1987 members or have continued rights to pre Finance (No 2) Act 1987 membership (see PSI2.3.22-23) the maximum approvable commutable lump sum cannot exceed the greater of

• 2.25 x the initial pension payable to the employee which has been reduced by the pension debit (see PSI6.5.93-94), or
• the maximum approvable lump sum determined in accordance with the scheme rules as if there had been no pension sharing on divorce order reduced by an amount of 2.25 x the amount of the pension debit (see PSI6.5.94).

The position is different to that for employees who are post Finance (No 2) Act 1987 members as there is no direct link between the initial pension payable and the maximum approvable lump sum benefit for pre Finance (No 2) Act 1987 members generally (see PSI8.1.2).

The limit for schemes that provide lump sum retirement benefits only is explained in PSI8.1.51.