PSI13.4.14 - Withdrawal from Service: Deferred Benefits under Individual Policies (Buy-Out Policies) – 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)

If a buy-out contract is subsequently subject to a pension sharing on divorce order (see PSI3.5.4), any future lump sum payable from the buy-out contract which is expressed as a monetary amount (see PSI13.4.7(c)) must be reduced by an amount of 2.25 x the pension debit. This requirement applies to all contract holders.

The pension debit is calculated by converting the amount underlying capital removed from the buy-out contract in accordance with the pension sharing order into an annuity equivalent. Most buy-out contracts will probably allow for benefits to be paid to the contract holder at any time between the age of 50 and 75.

If the contract holder is age 50 or over at the time of the pension sharing on divorce order, the amount of underlying capital removed from the contract must be converted into an immediate annuity equivalent. A single life, non-escalating annuity rate appropriate to the contract holder’s age at the time of the pension sharing order should be used. If all or part of the shared benefits are subject to LPI increases, a single life LPI annuity rate can be used instead.

If the contract holder is under age 50 at the time of the pension sharing on divorce order, the amount of underlying capital removed from the contract must be converted into an annuity equivalent using an appropriate age 50 single life, non-escalating annuity rate. If all or part of the shared benefits are subject to LPI increases, an age 50 single life LPI annuity rate can be used instead.