Pension reforms simplify ‘Silver’ divorces18 May 2015
With an ever increasing number of retirees separating and divorcing, David Smith, Financial Planning Director at Tilney Bestinvest, looks at the impact the new Pension Freedoms are likely to have:
“The new Pension Freedoms should make divorce settlements far more straightforward for the over 55s. To date the biggest problem with divorce settlements has been the fact that the largest assets are typically pensions and property. This has proved a serious issue as pension funds have been of limited immediate value in the past; after all, only 25% could typically be taken as a lump sum with the remaining 75% having to be used to provide a capped level of income.
“This created an anomaly in that both parties would consider a property worth, say, £500,000 as potentially more valuable than a £500,000 pension fund. After all, the property is of tangible value and could be sold at any time, whilst a £500k pension fund could only generate a tax free cash lump sum of £125,000 and the remaining pension pot might have generated an income of as little £20,000 per annum gross. Settlements in such situations were therefore invariably difficult and would often result in the pension being split and the property being sold with the proceeds subsequently distributed – an outcome neither party often desired.
“Moving forward however and today’s pension funds have far more ‘real value’; 25% can still be taken tax free, whilst the remaining 75% can be taken as a one-off, or series of uncapped payments. Of course any payments in excess of 25% will be subject to income tax but at least the new pension reform rules allow pensions to be valued as capital assets rather than income-producing assets.
There are three ways in which pension benefits can be dealt with as part of a divorce settlement; offsetting, earmarking or sharing:
“This is the oldest and still most commonly used method of dealing with pension benefits. Quite simply, the couple keep their own pension rights with the value being offset against other assets – so if the husband has significant pension rights he will keep these in their entirety but his spouse will get a larger share of other assets, for example the marital home, to reflect this.”
“Pensions earmarking is effectively a form of deferred maintenance payment. Therefore, all or part of the pension benefits of one party are ordered to be paid to the other spouse. When a pension earmarking order applies, the pension paid to the ex-spouse will be taxed at the rate(s) appropriate to the member. Furthermore, earmarked benefits are assessed against the member’s lifetime allowance.”
3. Pension sharing
“Typically a pension sharing order will result in the ex-spouse receiving a proportion of the member's pension fund. Depending upon the scheme providing the member’s benefits, the sum to be shared may either be used to provide benefits for the ex-spouse under the member’s scheme or be transferred to a scheme of the ex-spouse’s choice.
“The new rules should mean that many divorcing couples are no longer, in effect, forced to sell property: pensions now have a real tangible capital value so the distribution of assets should become far more straightforward. Unfortunately however, if one or both of the parties are members of an unfunded Statutory Scheme such as the Civil Service Scheme, the same old problems still exist, as such arrangements are not subject to the Pension Reform rules.”
For further comment on this issue David Smith can be contacted on 0191 269 9970 / firstname.lastname@example.org
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Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 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. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.