PSI13.3.33 - Withdrawal from Service: Maximum Deferred Benefits – Pension Sharing on Divorce – Calculation of the Pension Debit
(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)
A pension debit is taken into account for Revenue limits
purposes on the basis of a hypothetical deferred pension equivalent
of the pension debit, or “negative deferred pension”.
Where an employee leaves pensionable service before normal
retirement date the pension debit is calculated in the same way as
for someone retiring at normal retirement date. Examples given in
PSI6.5.95 for defined benefit
schemes and
PSI6.5.96 for money purchase
schemes should be followed. In both examples the deferred pension
equivalent established at the date of divorce is revalued to normal
retirement date by reference to the Statutory Revaluation
requirements under Social Security legislation that are applicable
to deferred defined benefits generally (see
PSI6.5.97). In the case of
leaving pensionable service before normal retirement date, the
deferred pension equivalent of the pension debit is revalued in the
same way but only for the period between the date of divorce and
the date of leaving pensionable service. This revaluation
requirement applies to the calculation of the pension debit in
relation to the maximum limits at the date of leaving pensionable
service for both pension and lump sum benefits.
Example
Maximum approvable pension benefit for a pre Finance (No 2)
Act 1987 member is 1/60th of final remuneration for each year of
service
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
leaves pensionable service 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].
