PTM176230 - Lump sum allowance and lump sum and death benefit allowance: Primary protection: Divorce
If you are looking for information about pre-commencement pension credit rights prior 6 April 2024, please see the National Archives.
The Welfare Reform and Pensions Act 1999 (or Welfare Reform and Pensions (Northern Ireland) Order 1999) includes provisions allowing for an individual’s pension rights to be split or shared with an ex-spouse following a divorce or dissolution of a civil partnership (see PTM029000) and introduces the concept of pension debits and pension credits.
Pension credits
Where pension sharing occurs the amount awarded to an ex-spouse or former civil partner is referred to as a pension credit right. As the pension credit right will increase the ex-spouse’s existing pension rights. The legislation provides that ex-spouses acquiring pension credit rights may be entitled to enhance their lump sum and death benefit allowance.
An ex-spouse may be able to claim an allowance enhancement provided certain conditions are met. How this is dealt with depends on whether the pension credit rights were acquired before or after 6 April 2006. This guidance only applies to pension credit rights acquired before 6 April 2006. For pension credit rights acquired on or after 6 April 2006 see PTM175400.
Pre-commencement (pre-6 April 2006) pension credit rights
Paragraph 18(4)-(6) Schedule 36 Finance Act 2004
Where pension credit rights were acquired before 6 April 2006 an enhancement factor known as “the pre-commencement pension credit factor” could be given providing and individual notified HMRC by 5 April 2009 of any pre-commencement pension credits the enhancement can be given to ensure parity pf treatment with the previous tax regime.
Those that make a valid late application for the pre-commencement pension credit enhancement factor on 6 April 2024, until the 5 April 2025, should follow the below guidance to see details on how the enhancement factor is calculated. For those that already have the enhancement factor, see PTM175500 to see how to apply it at a relevant benefit crystallisation event or the National Archives to see how it was previously calculated.
The following formula is used to determine the pre-commencement credit factor:
A / £1,500,000
Where A is the amount of the pension credit awarded for the purposes of section 29(1) of the Welfare Reform and Pensions Act 1999 or Article 26(1) of the Welfare Reform and Pension (Northern Ireland) Order 1999 increased by the percentage increase in the retail price index (RPI) from the month in which the rights were acquired to April 2006.
The factor should go to two decimal places. This should be a rounded-up figure, so for example if the calculation produces a factor of 0.231 this becomes 0.24.
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
An individual was awarded a pension credit of £135,000 in January 2001. By applying the increase in RPI from January 2001 to April 2006, the pension credit on that date was worth £150,000.
Provided a successful late application was received between 6 April 2024 to 5 April 2025, the individual will have the enhancement calculated using the above formula.
£150,000 / £1,500,000 = 0.1.
The individual’s enhancement factor would be 0.1, and HMRC will issue a certificate showing the enhancement to their lump sum and death benefit allowance.
Interactions with primary protection
Paragraph 18(1) Schedule 36 Finance Act 2004
An individual who became entitled to a pension credit before 6 April 2006 but who has also notified HMRC that they are claiming primary protection could not also have a pre-commencement pension credit factor. This is because the benefits the individual has protected under primary protection should include the value of the pension rights from the pension credit, so the primary protection factor the individual has received will incorporate the pre-commencement pension credit element.
Notification procedure for the pre-commencement pension credit factor
Regulations 5 and 12 The Registered Pension Schemes (Enhanced Allowances) Regulations 2006 - SI 2006/131
An individual normally had to notify HMRC of their entitlement to a pre-commencement pension credit factor using form APSS 201 in the period 6 April 2006 to 5 April 2009. HMRC may accept a late notification in limited circumstances. See PTM176600 for guidance on late notification.
HMRC will issue a certificate confirming the pre-commencement pension credit factor the individual is entitled to. The certificate is valid until such time as the certificate (or any amended certificate) is revoked or amended by HMRC.