(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)
[PN17.27-28]
How the tax liability is calculated by the scheme
administrator will depend on whether or not any of the
member’s benefit entitlement in the scheme has been the
subject of a pension sharing on divorce order (see
PSI3.5.4). An explanation of
the liability for a member whose benefits were subject to a pension
sharing order is given in
PSI17.2.57. Where a member’s
benefits have not been affected by a pension sharing on divorce
order, the 20% tax charge is applied to the amount by which the
commutation payment exceeds the greater of
a. 3N/80ths (up to a maximum of 120/80ths) of final remuneration for each year of service with the relevant employer less any lump sum received other than by commutation. Final remuneration is for this purpose based on the statutory definition in section 612 ICTA 1988 (ie the average annual remuneration (subject to the permitted maximum where appropriate) of the last 3 years’ service) rather than that used in the scheme rules, or
b. the maximum allowable lump sum under the scheme rules (except the provisions for entire commutation) when the triviality or serious ill health lump sum was taken. Where the scheme rules provide for incapacity benefits which take account of future notional service to normal retirement date, that service may, where the circumstances justify it, be taken into account in calculating this maximum lump sum. In triviality commutation cases, any amounts which are otherwise non-commutable under contracting-out requirements should be excluded from the calculation of the maximum lump sum deductible.
