Pensions on Divorce: Expert Divorce Solicitors covering Newcastle and Sunderland
In divorce or dissolution, the pension can be the biggest asset after the family home. This article aims to provide your with greater understanding from Emmersons Solicitors Expert Divorce Solicitors (with offices in Newcastle and Sunderland) and our latest guidance.
You can split pensions several ways, so it’s worth understanding the options before deciding what’s best for you. It is important to get professional advice before you act.
The starting point is to list all the different pensions you and your ex-partner have, and get a copy of the rules for each scheme. This could include schemes you have through work, personal pension schemes and Additional State Pension (but not the basic State Pension).
The total value of the pensions you have each built up are potentially taken into account. It is possible to argue in some cases to exclude a certain proportion of one or both parties’ pension pots if the same were accrued before the marriage or post separation but this depends on the circumstances of each individual case.
Where one party, still more often than not the Husband, holds all the pension assets or has pension assets worth more than the pension assets held by the other spouse, still more often than not the Wife, the Courts mainly deal with splitting the pension(s) in two ways:
- By making a pension sharing order transferring a share of the Husband’s pension assets to the Wife, or;
- By offsetting the value of the husband’s pension over and above the wife’s and giving the wife a greater share of the marital home or any savings/investments.
Many wives have preferred the offsetting option, desiring a greater share of the house proceeds and savings, and in some cases the house has even been transferred to the wife; the husband retaining his pension. The difficulty being in such cases how to calculate a fair offset value as it is not simply the case of treating a £1 of pension as the equivalent of £1 in cash.
Changes introduced from April 2015 give you more freedom over how you can use your pension pot(s) if you’re 55 or over and have a pension based on how much has been paid into your pot (a defined contribution scheme).
- Choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity, or
- Take up to 25% of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity your income isn’t guaranteed for life, or
- Use the pension pot to take cash as and when you need it. For each cash withdrawal the first 25% is tax-free and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year or
- Close your pension pot and take the whole amount as cash in one go if you wish. The first 25% will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.
- From April 2017 there is to be a new rule introduced allowing pension holders to sell their annuities in return for a lump sum.
These more flexible rules mean in certain cases there can be less discounting of the pension asset when one party seeks for their interest in the pension to be offset due to the fact that it is now possible to access more of the capital as a lump sum.
If the divorced couple are over the age of 55 years the new rules now mean that a lump sum from the pension pot could be used to compensate for the difference in pension values which could avoid in some cases the need for a pension sharing order.
There is now more flexibility for pension holders to raise lump sums, if they are 55 and over. This could assist where a couple are divorcing and there is insufficient capital for them both to re-house, for example, but substantial pension assets. Robust independent financial advice will be essential in such cases due to the consequences potentially being wide-ranging. This will certainly not be a step to taken lightly.
The courts cannot currently order a party to ‘cash in’ their pension or part thereof but they can make lump sum orders which could effectively necessitate a party to do exactly that to comply with its terms. The consequences of the same would need to be carefully assessed to ensure overall fairness.
Only time will tell how the new pension rules impact on divorce settlements. It is of upmost importance for anyone separating or divorcing where there are pension assets involved to take independent financial advice, alongside expert legal advice, to ensure that they have the best possible outcomes.
Should you require assistance in relation to divorce and financial remedy cases, particularly considering your financial needs on divorce, contact Rachel Smith at Emmersons on 0191 567 6667 or by email at firstname.lastname@example.org
If you think that this applies to you then contact us for to arrange a ‘Next Steps’ Divorce Advice Session.
Book your ‘Next Steps’ Divorce Advice Session at our Newcastle office: 0191 284 6989
Book your ‘Next Steps’ Divorce Advice Session at our Sunderland office: 0191 567 6667
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