PSI13.4.13 - Withdrawal from Service: Deferred Benefits under Individual Policies (Buy-Out Policies) – Required Provisions - Pension Sharing on Divorce

(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)

As explained in PSI13.4.7(c), a buy-out contract should contain provisions which show the maximum lump sum benefit that be taken by commutation of the payable annuity. Where, in relation to the scheme that purchases the buy-out contract, an employee’s benefit entitlement is

• permanently reduced by a pension sharing on divorce order (see PSI3.5.4), and
• the pension debit must be taken into account for Revenue limits purposes (see PSI6.5.89)

the effect of the pension debit must be reflected in the maximum lump sum payable from the buy- out contract.

For a member with pre Finance (No 2) Act 1987 continued rights in the scheme purchasing the buy-out contract the lump sum payable from the buy-out contract can be expressed as

• a monetary figure - which must not exceed the amount determined in accordance with the rules of the scheme that purchased the buy-out contract as if there had been no pension sharing on divorce order less the amount of 2.25 x the pension debit (see PSI13.3.34), or
• 2.25 x the initial annual amount of contract holder’s annuity before commutation or any allocation to provide a widow/widower/dependant(s) pension.

For a member with post Finance (No 2) Act 1987 continued rights or no continued rights in the scheme that purchases the buy-out contract, the lump sum payable from the buy-out contract must be expressed as

• 2.25 x the initial annual amount of contract holder’s annuity before commutation or any allocation to provide a widow/widower/dependant(s) pension.

Where the amount of lump sum is expressed as 2.25 x the initial amount of payable annuity, the pension debit has had a bearing on the payable annuity as the pension benefit originally secured in the buy-out contract could not have exceeded the amount of pension that could have been paid from the scheme that purchased the buy-out contract had there been no pension sharing on divorce order less the pension debit (see PSI13.3.32).