Duncan Carmichael-Jack considers divorce and the sticky issue of pensions: protecting and rebuilding.
No-one can pretend that pension planning is the most exciting subject to engage with. But make no mistake as to the importance of understanding the tax treatment of your or your ex-spouse’s pension arrangements in any divorce settlement. Whether the task is protecting their value, obtaining a true and accurate valuation or seeking to re-build pension savings, the legislation can be complex and, at times bewildering.
Re-building pension benefits
If life was simple then it would be a relatively easy task to invest money back into a pension fund after a divorce. But life is not simple and nor are the tax rules. The government essentially caps the amount of contribution that can be made tax efficiently to pensions by using a mechanism called the Annual Allowance. For this tax year it is set at £40,000. It is also possible to carry forward unused annual allowance from the three previous tax years under prescribed circumstances. If you are a UK taxpayer, in the tax year 2015-16 the rule is that you will get tax relief on pension contributions of up to 100% of your earnings or the £40,000 annual allowance. Confused? It gets worse! From next tax year the annual allowance for higher earners will be tapered away, so that an individual with earnings in excess of £210,000 will have an annual allowance of only £10,000 and NOT £40,000. This could have a significant impact on a person’s capability to restore and re-build pension savings.
Protecting pension benefits
It is difficult where to start! Everyone has a Lifetime Allowance which from the tax year 2015/16 will be set at £1m. Pension savings in excess of this value can be taxed at up to 55% dependent upon how they are taken. The key point is that the government has introduced a number of different ways to protect pension funds from a potential tax charge. With any divorce settlement it is vital to establish whether a) some form of protection has been implemented and b) what type of protection/s (yes it is possible to have more than one) is in place. From the next tax year there will be up to eight different ways to protect a pension fund and each will (or could) have a slightly different way of working when brought into account for a divorce settlement.
The fact is that pensions are incredibly complicated and my recommendation is to seek professional advice as early as possible to avoid any nasty traps and make use of the tax and financial planning opportunities available.
The information and opinions expressed herein are the views of Vestra Wealth LLP and are based on current public information we believe to be reliable but we do not represent that they are accurate or complete and should not be relied upon as such. Any information herein is given in good faith, but is subject to change without notice. Investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invested.