Tag Archives: Pensions

Divorce and pensions

Duncan Carmichael-JackDuncan 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.

Duncan Carmichael-Jack

Disclaimer:

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.

New options on pensions

Vince LaneVince Lane explains why the new rules on pensions give divorcing couples useful new options when arranging their finances.

I’ve been working as an adviser to people going through divorce for over 20 years now, and throughout that time I’ve become used to reacting to the regular changes in the options for divorcing couples in dealing with their pensions. When I first started in the field, pensions were highly inflexible investments and there were only two real options – offsetting the value of one person’s pension against an asset retained by the other, often the house; and pension earmarking, which required a proportion of one person’s pension to be paid to the other but had significant disadvantages, and inflexibility.

We then saw the introduction of pension sharing orders, which are very common now in divorce and have gone a long way towards reducing the unfairness that often occurred when one person’s large pensions couldn’t previously adequately be divided up. For many couples, particularly those some way from retirement age, pension sharing is still likely to be the best option on divorce.

However, the new flexibility available to those aged 55 and over in defined contribution schemes, (such as personal pension plans) goes further in expanding the range of options. Since 6 April 2015, pension investors have total freedom over how they take an income or a lump sum of capital from their pension, effectively freeing up the pension as an asset for potential immediate use by either or both former spouses, subject to taxation. These new provisions offer a new set of choices for those nearing retirement age and going through divorce.

A pension investor can now take the entire pension fund in one go, if necessary or desirable. The first 25% will normally be free from tax, and the balance taxed as income at the individual’s marginal rate. Alternatively the pension fund could be taken in smaller lump sum amounts at irregular intervals, which may be useful for example to fund loan repayments, or larger cash flow issues. Again, typically the first 25% of each withdrawal is tax-free with the balance taxed as income.   Alternatively, an individual might take 25% in the form of a tax-free lump sum and take a regular taxed income from the balance of the fund, or buy an annuity if a guaranteed income is needed.

Pensions are complex products and, for those with significant amounts of money tied up in them, they need careful handling on divorce. The beauty of the collaborative process is that both spouses have the opportunity to sit down with their lawyers and a pensions expert like myself, in a calm and constructive atmosphere, to work out the most efficient way to deal with these assets from all the different options available. This increased pension flexibility is another tool in the toolbox of the Creative Divorce professionals to enable progress towards a fair and cost-effective settlement that is acceptable to the whole family.

vincel@r-sassociates.co.uk