PSI8.1.51 - Lump Sum Benefits and Commutation: Maximum Lump Sum Benefits – Pension Sharing on Divorce – Lump Sum Only Schemes

(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)

[PN8.6]

Where a scheme

• provides a lump sum retirement benefit only that does not exceed 3/80ths of final remuneration for each year of service

and

• an employee’s benefit entitlement in the scheme is permanently reduced by a pension sharing on divorce order

and

• the employee is not a moderate earner (see PSI6.5.89-90)

the maximum lump sum benefit for all employees (but see PSI8.1.35) is

• the amount of lump sum benefit payable to the employee in accordance with the scheme rules had there been no pension sharing on divorce order

less

• an amount representing the lump sum allocated to the ex-spouse increased between the date of the divorce and the date the employee takes is of her lump benefit by the statutory Revaluation Order in force at the date that the lump benefit is taken.

Example

Employee, age 50, earning £30,000 a year with 20 years service and accrued lump sum entitlement of £22,500 ([3x20/80] x £30,000) at the date of divorce.

Pension sharing on divorce order requires 50% of the employee’s accrued benefit to be passed to the ex-spouse resulting in a lump sum debit (as opposed to a “pension debit”) of £11,250.

The lump sum debit must be taken into account for calculating maximum approvable lump sum benefit 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.

At normal retirement age of 60 the employee’s final remuneration is £48,000. The maximum approvable lump sum benefit had there been no pension sharing order is £54,000 ([3x30/80] x £48,000).

The lump sum debit at normal retirement age is £16,800. The amount of lump sum allocated to the ex-spouse at the date of divorce, £11,250, has been revalued between the date of the divorce and normal retirement date on the basis of the amount of statutory revaluation that would have been required under Social Security legislation had the employee been entitled to a deferred lump sum benefit of £11,250.

The maximum approvable lump sum is £37,200 (£54,000 less £16,800).