Tackling the Thorny Issue of Pensions on Divorce
Pensions have been in the news a lot again recently following the major reforms George Osborne announced in last year’s Budget.
Fundamentally the Chancellor changed how people can access their pension savings. Under the old system only those with a very large pension pot typically worth over £310,000 or those with total pension wealth below £18,000 could access their pension savings before retirement.
Under the new system however, which came into force in April 2015, everyone aged 55 and over with defined contribution pension savings can take the whole amount as a lump sum, paying no tax on the first 25% and the rest taxed as if it were a salary at their income tax rate.
Importantly the new legislation applies only to private and not state pensions. According to the Government the new system is all about giving choice back to individuals and trusting them with their own finances, but it also adds a further level of complexity.
A recent survey by think tank The International Longevity Centre – UK revealed “shockingly low” levels of knowledge about pensions among people approaching retirement age.
For example, only one in three (34%) of women said they understand what an annuity is, rising to just over half (54%) of men.
As a family law specialist I often meet couples who are also unaware that pensions can be included as assets in divorce financial settlements.
Pensions are becoming much more valuable and sometimes the only or the largest asset, particularly in the case of public sector pensions, for example, the armed forces, police and teachers’ pensions, so it’s important that they’re included in the financial settlements of divorces and civil partnership dissolution.
You and your ex-spouse or partner can decide how any pension benefits are split, and understanding the implications of the various options could make a big difference to your pension provision.
Pension sharing allows a share of the value of the member’s pension to be transferred to the former spouse or civil partner who will either become a member of the pension scheme in their own right or have a new pension set up for them for that value.
Pension offsetting or capitalising on the other hand allows a person to retain their pension assets, but these are then offset against the other assets – for example, if one person has a large pension pot, the other may receive the house as extra capital instead (assuming it has a similar value).
If you opt for the third option – pensions attachment also called pensions earmarking - when you start to draw retirement benefits, part of them are paid to your ex-spouse or partner or vice versa.
One option may be better for you and your ex-partner than another, which is why both parties should seek advice independently from a solicitor who specialises in family law to protect their own interests.
Additionally certain options – pension sharing and pensions attachment / earmarking – require a court order.
George Osborne’s reforms have unfortunately made the issues surrounding pensions and divorce more complicated, particularly for divorcees who already have orders in place. Again I would strongly recommend that they seek advice from a solicitor or accredited pension specialist to ensure that their provision is still properly protected.
For example, pension attachment orders were drawn up some 20 years ago when you couldn’t make full withdrawals before you retired. Following the reforms, bitter divorcees might be tempted deprive their ex-spouse of their share by cashing it in early.
Ultimately the Department of Work and Pensions needs to clarify the laws surrounding pensions on divorce to ensure a fair outcome for everyone involved.