Divorce – the battle for the pension

17 August 2017
 

Figures from the Ministry of Justice show that there has been a 43% year on year increase in the number of pensions being targeted during a divorce settlement - 11,503 in the year to March 2017, up from 8,027 in the previous year. Gary Smith, chartered financial planner at Tilney, takes a look at the reasons behind this.

“Over the past couple of years, we have seen the average age of a couple getting divorced rising, leading to the so called ‘silver divorces’. Historically, no matter what age a couple was when divorcing, the pensions pot either member had did not play a huge part in the financial settlement due to the fact that typically only 25% could be taken as a lump sum. However, when the pensions freedoms were first announced and it became possible for people to access a potentially large lump sum at the age of 55, some in the industry predicted that pensions would become a much bigger focus for solicitors. And it appears that has indeed been the case.

“If a couple divorces in their 30s, the chances are they will not have had the time to build up a significant pot and therefore the pension may well be dealt with by offsetting the value against other assets. In their 60s, however, the pot is likely to be at its greatest value, and solicitors are becoming increasingly more savvy in this respect. There has also been a lot of noise in the media recently about the large sums people have been offered to transfer out of their Defined Benefits scheme, and this has also put the pension pot on people’s radar.

“We have also noticed an increase in solicitors favouring splitting pensions as part of a settlement as the divorcee is guaranteed to get something rather than a maintenance payment that would cease on the death of the former spouse. Also, pensions don’t typically form part of your estate for IHT purposes.

“However, there are some circumstances where giving up part of your pension could actually benefit you. For example, reducing your pension could bring you below the lifetime allowance limits, and avoid potential tax charges of up to 55% being incurred in retirement. This could prove beneficial for those who have pension pots in excess of £1m. Although following divorce, where an individual sees a reduction in their pension pot, it might prove difficult to rebuild their pot due to the Annual Allowance being reduced to £40,000 or for those earning above £150,000, the Tapered Annual Allowance potentially restricting funding to only £10,000.

“As always, it is best to get dedicated financial advice to ensure you and your solicitor get the best outcome for all parties.”

About Tilney

Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.