The Government tightly regulates the provision of pensions for many reasons, including:

· protecting the public from harm,

· nudging them towards sensible choices, and

· discouraging choices that abuse the tax relief conferred on pension savings.

It makes rules and sets expectations to discourage harmful practices and encourage virtuous practices. But these rules and expectations are no good unless the Government communicates them clearly. Any failure here makes it difficult for pension providers to know what to do, or not do.

Our job at Aries Insight is to help pension providers understand the expectations of Governments and Regulators. Not an easy task.

HM Revenue & Customs have produced an extensive Pensions Tax Manual (“PTM”) to help. Please don’t get the wrong impression, it is invaluable. But it can send unwary pension professionals down the wrong path. Take this example:

The lifetime allowance of the ex-spouse or former civil partner may be increased by an appropriate lifetime allowance enhancement factor to reflect the increased benefits provided by those pension credit rights.

So far, so good. This says that recipients of pension credit rights – a share of an ex-spouse’s pension benefit in a divorce settlement – may have their lifetime allowance (“LTA”) uplifted. If someone receives a £150k credit from their ex-spouse, and the standard LTA is £1.5m, their personal LTA can be uplifted by 10% (1.5m divided by 1.5k).

This guidance covers only pension shares of benefits that have already been put into payment. In that situation, the benefit should already have been tested against the original benefit holder’s LTA (assuming they retired in the last 15 years).

The guidance goes on to explain:

This ensures the pension credit rights (or the proportion of those rights attributable to a post-commencement pension in payment) are not tested again for lifetime allowance purposes when the ex-spouse or former civil partner crystallises those rights, this lifetime allowance enhancement factor is called the pension credit factor.

Wait, so we’re not supposed to test the pension credit rights against the lifetime allowance. So why is their lifetime allowance enhanced?

Imagine the recipient of the pension credit rights in our example already had £1.65m in their existing pension fund at the time (imagine the Beckhams divorcing). They would have exceeded the £1.5m standard LTA on crystallisation before the share, but now their existing benefits are inexplicably within their new enhanced LTA (1.5 uplifted by 10% is 1.65).

I used to be a pensions administrator. I can just imagine picking up this case at 4.30 on a Friday afternoon and trying to get my head around this mixed messaging so I can go home for the weekend.

The answer is that the pension credit rights must be tested against the (enhanced) LTA when they crystallise. The enhancement accounts for their double counting. The administrator shouldn’t exclude them, as they’re advised by the PTM, to account for it again.

My colleague Dave King discovered this misguidance. Being the curious sort, he dug a little deeper.

The slimmed-down PTM replaced the mammoth Registered Pension Schemes Manual (“RPSM”) in late 2015. The RPSM contained a similar sentiment:

To ensure the pension credit rights (or the proportion of those rights attributable to a post-commencement pension in payment) are not tested again for lifetime allowance purposes when the ex-spouse or former civil partner crystallises those rights, the lifetime allowance of the ex-spouse or former civil partner is increased by an appropriate lifetime allowance enhancement factor, to reflect the increased benefits provided by those pension credit rights.

Burrowing deeper still, Dave found what we expect is the seed of this error. In the Explanatory Notes for the Finance Bill 2003/2004 we find:

The aim under pension simplification is to change the tax treatment so that for a pension shared after 6 April 2005 the pension credit will count against the acquiring spouse's lifetime allowance. But a crystallised pension shared after 6 April 2006 will have already been tested against the lifetime allowance. To ensure the pension credit is not tested again, the recipient's lifetime allowance may be increased by the appropriate pension credit factor, to reflect the increased benefits the pension credit provided.

Perhaps you think us pedantic. It must be next to impossible to write War and Peace II: Pensions Tax without a single line being open to misinterpretation. You can see their thinking too. It might have been better to say those rights are not tested against the standard LTA again, though that too has the potential to mislead.

For us though, that is 17 long years of potential confusion. That could mean hundreds of administrators stuck in the office on a Friday evening.