(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)
Where revaluation of the deferred pension equivalent of a
pension debit needs to be considered when an employee retires
before normal retirement date (see
PSI10.1.33), the method of revaluation
will depend on whether the scheme gives defined benefits or money
purchase benefits.
The deferred pension equivalent of the pension debit established at the date of the pension sharing on divorce order is revalued between the date of the divorce and the date of early retirement by reference to the Statutory Revaluation that applied to deferred defined benefits generally. Where the scheme imposes an actuarial reduction on the actual early retirement benefit paid to the member, the revalued deferred pension equivalent of the pension debit at the early retirement date can be reduced in the same proportion as the member’s actual benefit is reduced.
Maximum approvable pension and lump sum benefit for a pre
Finance (No 2) Act 1987 member is 1/60th and 3N/80th respectively
of final remuneration for each year of service
The scheme does not impose an actuarial reduction on early
retirement pensions
Hypothetical deferred pension equivalent of pension debit at
date of divorce is £4,000 (see Example in
PSI6.5.95)
Scheme normal retirement date is age 60 but the employee
retires early at age 55 with 25 years of service and final
remuneration of £39,000
Full benefit entitlement had there been no pension sharing is
25/60 x £39,000 = £16,250
The hypothetical negative deferred pension calculated from
the employee’s cash equivalent transfer value at the time of
divorce of £4,000 has increased to £4,890 – this is
because the scheme is required to revalue deferred pensions in line
with statutory revaluation orders (for the purpose of this example
only the statutory revaluation has been taken as 4.1% a year)
The employee’s actual maximum approvable pension is
£11,360 (£16,250 - £4,890)
The maximum lump sum is £25,560 - in this case the same
result is found from either 2.25 x £11,360 or [(75/80 x
£39,000) – 2.25 x £4,890].
Where a scheme imposes an actuarial reduction of, say, 4% to
the pension for each year the pension is paid in advance of normal
retirement date, the employee’s pension benefit would be
£9,260, as follows
The maximum approvable pension, had there been no pension
sharing, that could be paid at early retirement of £16,250 is
reduced at a rate of 4% a year to £13,250
The revalued deferred pension equivalent of the pension debit
at the early retirement date of £4,890 is also reduced by the
same 4% rate to £3,990
The actual pension payable is £9,260 (£13,250 -
£3,990)
The maximum lump sum is £27,585 as [(75/80 x
£39,000) – 2.25 x £3,990] is greater than 2.25 x
£9,260).
The revaluation requirements under the Welfare Reform and Pensions Act 1999 (see PSI6.5.97) for deferred benefits in money purchase schemes differs from the requirements for deferred benefits in defined benefits schemes. For Revenue limits purposes the deferred pension equivalent of a pension debit in a money purchase scheme is revalued as if the deferred pension equivalent was a deferred defined benefit. The rate of statutory revaluation between the date of the divorce and the payment of the employee’s benefits would be equivalent to that which applies to a non-GMP defined benefit. However, the deferred pension equivalent of the pension debit established at the date of divorce using “factor 5” provided by the Government Actuary’s Department (see PSI6.5.96) is based on the assumption that the member would have received benefits at his or her normal retirement date. As the member’s benefits are paid earlier than expected, the revalued deferred pension equivalent of the pension debit can be reduced by a factor of not less than 6.5% compound for each year the member’s benefits comes into payment in advance of the normal retirement date.
Employee with pre-89 benefit entitlement is age 40 at divorce
Scheme normal retirement date is 60 and the employee retires
early at age 50 with final remuneration of £39,000
Hypothetical deferred pension equivalent of pension debit at
divorce is £6,245 (see Example in
PSI6.5.96).
At the date of early retirement the pension debit figure has
increased to £9,333 in line with statutory revaluation orders
that would have applied to deferred defined benefits generally (for
the purpose of this example only the rate of revaluation is 4.1% a
year)
As the hypothetical deferred pension equivalent of the
pension debit established at divorce, £6,245, is based on the
assumption of the employee retiring at normal retirement date the
revalued deferred pension equivalent figure of £9,333 can be
reduced by no more than 6.5% compound for each year the member
retires before normal retirement date
Maximum benefit entitlement had there been no pension sharing
is based on N/NS x P which is 20/30 x (2/3 x £39,000) =
£17,333 (preservation does not override in this example
– see
PSI10.1.14)
Hypothetical deferred pension equivalent of pension debit is
£4,766 – the revalued figure of £9,333 is reduced
by 6.5% compound for each year between the early retirement date
and the normal retirement date (part years may count
proportionately)
Maximum pension payable to the employee is £14,156
(20/30 x [(2/3 x £39,000) - £4,766]) – note the
pension debit is deducted from the “P” part of the
calculation.
The maximum lump sum is £31,851 (2.25 x £14,156 is
greater than ([20/30 x (1.5 x £39,000)] – 2.25 x
4,766).
