DIVORCE
Synopsis: This section covers how the pension sharing rules are affected by the provisions of the new regime
Last Reviewed: Tuesday, May 06, 2014 Last changes made: Updated to include some very minor amendments to Section 3
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Content
1. Pension Sharing Order – Effective on or after 6 April 2006
2. Pre A-Day Pension Sharing Order – Pension Credit commences to be paid on or after 6 April 2006
3. Definition of “Pension Credit” Member
1. Pension Sharing Order – Effective on or after 6 April 2006
Any pension credit arising from a pension sharing order on or after 6 April 2006 will count against the ex-spouse´s Lifetime Allowance (and not against the member´s Lifetime Allowance). The pension credit will not, however, count against the ex-spouse´s Annual Allowance.
Where a pension credit arises from a member´s benefits that have been crystallised (i.e. vested) on or after 6 April 2006, this will still be set against the ex-spouse´s Lifetime Allowance, but the ex-spouse can notify HMRC that he/she wishes to claim an enhanced Lifetime Allowance – the enhancement being equivalent to the capital value of the pension credit. Any such notification to HMRC must be made by no later than 31 January following the tax year in which the pension credit was paid. The ability to claim an enhanced Lifetime Allowance is provided because the member´s benefits, from which the pension credit is taken, will already have been tested against the member´s Lifetime Allowance when they were crystallised.
2. Pre A-Day Pension Sharing Order – Pension Credit commences to be paid on or After 6 April 2006
Where a pre A-Day pension credit commences to be paid on or after 6 April 2006, the value of the pension credit will count against the ex-spouse´s Lifetime Allowance, but he/she will be able to notify HMRC that he/she is seeking an enhanced Lifetime Allowance – the enhancement being equivalent to the capital value of the pension credit. This enhancement is determined using the formula IAPC/SLA, where IAPC is the amount of the pre A-Day pension credit increased by the percentage increase in the RPI from the month in which the right was acquired to April 2006. SLA is the standard Lifetime Allowance for tax year 2006/07. This is perhaps best demonstrated by an example:
An ex-spouse was awarded a pension credit with a value of £135,000 in January 2001. By applying the increase in the RPI from January 2001 to April 2006 the value of the pension credit increases to £150,000 by April 2006. By applying the formula IAPC/SLA (i.e. £150,000/£1,500,000) this will result in a 10% enhancement to the ex-spouse´s Lifetime Allowance.
Any such notification must be made to HMRC by no later than 5 April 2009. It is understood that where an ex-spouse intends to rely on primary protection from the Lifetime Allowance charge he/she cannot separately notify HMRC of the pension credit as it will be included in the value of the individual´s rights in the notification for primary protection.
The pension credit will not, unlike the rules under the pre A-Day regimes, be set against the member´s Lifetime Allowance.
3. Definition of “Pension Credit” Member
An amendment has been made in the Finance Act 2006 to the definition of “pension credit member”. The rules of the new regime apply sanctions if a registered pension scheme makes payments to or in respect of individuals who are not scheme members. Prior to the amendment section 151(5) of the Finance Act 2004 defined a “pension credit member” as someone with rights under a pension scheme attributable directly or indirectly to pension credits. This definition did not cover someone who died before the pension credit was used to buy pension rights in a registered scheme. The Finance Act 2006 amended section 151(5) of the Finance Act 2004 to bring former spouses or civil partners, who die before the pension sharing order that has been made can be implemented to provide pension rights on their behalf, within the definition of “pension credit member”. This means that in such cases the scheme is authorised to make payments of death benefits to their estate or dependants.
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