How does the CMS deal with pension contribution levels when considering variations?

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The UK Government obliges all employers to contribute into an employee pension scheme to provide for their retirement.

People are of course able to make their own pension arrangements to plan for their retirement by making additional (voluntary) contributions into their employee scheme or using a Self Invested Personal Pension (SIPP) into which they can put money.

Pension contributions are tax deductible meaning that when a person makes a contribution the money does not attract income tax and the effect is to reduce the taxable income in the year the contribution is made.

Child Maintenance is calculated on gross taxable income (net of pension contributions).

Why are Pensions relevant to the Child Maintenance Service?

The variation regime of the Child Maintenance Service provides for receiving parents to apply for an adjustment to be made to the calculated amount if the pension contribution is considered to be “excessive”. If they decide to allow the variation then it will have the effect of increasing a paying parent’s gross taxable income (and the maintenance liability will therefore rise).

The CMS’s own guidance says the following

If a parent with care asks for a variation to be considered because they consider the private pension contributions to be excessive, you should check whether these contributions have been declared by the non-resident parent and taken into account in the maintenance calculation.

So what level of pension contributions does the CMS consider to be excessive?

It may not surprise readers to learn that the term “excessive” when applied in this context is very subjective. Essentially, it’s down to the caseworker to make a “discretionary decision” when looking at an individuals’ pension contribution and decide if they think it’s excessive.

Their Policy Law and Decision Making Guidance does provide some guidelines into % salary levels by referencing a historical document provided by the Financial Services Authority. They say:

If the private pension contributions have been declared then you should consider whether they seem excessive compared to their personal circumstances, for example their age. The former Financial Services Authority (FSA) guidelines should be used for comparison.

Note: The FSA was abolished from 1 April 2013, to be replaced by two new bodies: the Financial Conduct Authority (FCA) and; the Prudetial (sic) Regulation Authority.

Neither of these has provided any new guidelines at present so the previous FSA guidelines should still be referred to, for comparison purposes.

Note: It should be noted that neither we, nor the Child Maintenance Service caseworkers are provided with the full FSA document so the figures that they are using could well be taken out of context. We don’t know what year the document was produced, what the anticipated retirement age was or, indeed the level of income that a person was hoping to achieve in their retirement.

They go on to say

A percentage of a non-resident parent’s income which could be considered a reasonable deduction could be estimated at around 12% of the gross income figure. However, when considering whether a non-resident parent’s pension contributions are excessive we need to have a wider view than just this percentage figure. Therefore, when we make these decisions we would consider each situation on a case by case basis, taking into account all the information available to us.

Some examples of information we should take into account are:

are the pension contributions being paid into occupational or private?

are there no employer pension contributions being paid?

has occupational/private pension amounts already been taken into account in the gross income figure? (If private pension amounts have not been declared by the non-resident parent for their gross income figure, then the gross income figure has not been reduced)

are the non-resident parent’s pension contributions over 12% of the nonresident parent’s gross income?

the age of the non-resident parent and how old was the non-resident parent when they started contributing to their pension? For example, a non-resident parent who began making pension contributions in their 40s could be paying a significantly higher amount of pension contributions than someone in their 20s

have we checked the FSA table for comparison purposes?

have lower than 12% pensions contributions been paid by the non-resident parent in the past?

 

So, there you have it. The CMS considers 12% to be a level that is “not excessive”.

This is despite the CMS using a guideline in which the percentages are being applied out of context and without reference to the original aims to which the FSA document applied.

It should be noted that, for the 2017/2018 tax year HMRC provides tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.

For completeness the old FSA table referenced in the CMS guidance is reproduced below:

 

Age Contributions StartedRequired Percentage of Income
3012% - 18%
3516% - 22%
4018% - 25%
4525% - 30%
5030% - 45%
5545% - 70%

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