RPSM03108010 - Technical Pages: Protecting pre 6/4/06 pension rights from tax charges: Pension credit rights

Pension credit rights acquired before 6 April 2006

Pension sharing on divorce was introduced in 1999 under the pension sharing provisions in the Welfare Reform and Pensions Act 1999 and Schedule 10 of the Finance Act 1999 or Welfare Reform and Pensions (Northern Ireland) Order 1999.

An individual’s pension rights can be increased as a result of acquiring a pension credit as a result of a pension sharing order or provision.

Where pension credit rights in a registered pension scheme were acquired before 6 April 2006 the individual’s lifetime allowance is enhanced.

The acquiring of a pension credit occurs on the effective date of the pension sharing order. This is defined by Welfare Reform and Pensions Act as the ‘transfer day’.

The enhancement to the lifetime allowance is the value of the pension credit (indexed) expressed as a factor of the standard lifetime allowance for the tax year 2006/07. This is called the pre-commencement pension credit factor and is expressed in the formula

IAPC is the amount of the pension credit awarded for the purposes of section 29(1) of Welfare Reform and Pensions Act 1999 or Article 26(1) of Welfare Reform and Pensions (Northern Ireland) Order 1999 increased by the percentage increase in the retail price index from the month in which the rights were acquired to April 2006.

SLA is the standard lifetime allowance for the tax year 2006-07.

For the avoidance of doubt, the only permitted indexation of the pension credit is by the RPI percentage increase - as described above. This applies even where the pension credit contains an element attributable to contracted out rights.

Example