Divorce pension pitfalls and possible solutions.
Divorce pension pitfalls and possible solutions. Since the recent budgets presented a double whammy for divorcing couples the statistics for court outcomes suggest underuse of pension orders, with the last Quarter of 2015 recording only 11% of divorce settlements approved by the Court included a pension order. The double whammy was the squeeze on legal aid, meaning most people had to pay a lot for divorce solicitors or represent themselves and at the same time the government freed up pension assets like savings accounts to millions of middle aged people. Yet only 11% of court orders secure an order on the pension. How can such orders be obtained and what are the future implications of the new treatment of pensions as a liquid asset available after 55?
Michael Brennan is an advanced family panel member with 25 years experience and works as a solicitor at Stonehewer Moss in Northwich, Cheshire. He has thought through the implications of both difficulties, legal cost and early available pensions. The first issue should be addressed in two or three ways: firstly, agree a fixed fee with your solicitor to an agreed stage in the process to settle the divorce; secondly, consider available funding options from commercial companies if you cannot afford it or get help from family members ( such funding options can be accessed through a solicitor); thirdly, agree a small fee to write to your ex highlighting the issues and seeking early resolution or warn of legal services orders against him or her if she fails to co-operate, which are orders to fund your legal costs by your ex. The second issue pensions, calls for some crystal ball gazing and Michael says, “Traditionally , a pension has been a discrete asset like no other and logically I have felt the Court must struggle to depart from equality of pension distribution if the issue remains to be decided at a contested court hearing by the judge. The government statistics suggest the court is not making many such orders, which may reflect most people choosing to off set pension rights against assets like the house but may also suggest people are failing to achieve a fair outcome when representing themselves. In the past I have issued freezing injunctions to stop spouses withdrawing large sums from pension, often for services personnel who retire in early middle age. I can foresee the need for many more such orders now anyone over 55 can draw down the full value of their fund. There may be a nasty tax deduction if someone was to take the lot but does a separating spouse think in such terms? I think many divorcing people may lose out unless represented by a solicitor and they protect the assets early in the case. Anyone in mid forties must now see the pension pot on the horizon, possibly before they can access other assets like the family home; this changes the perception of pensions in divorce entirely and the court statistics suggest the issue is not being fully explored in most cases. I recommend separated people take specialist advice before agreeing to submit a divorce settlement for approval by the court when unrepresented.”
The new pension rules have now come into play (April 2015) allowing pension holders to withdraw some or all of the money held in a money-purchase, workplace, or personal pension. This is providing that you are over the age of 55 (increasing to 57 in 2027) and have not already begun to draw on your pension or bought an annuity. While you can still convert your pension into an annuity or invest it in a drawdown product, the new rules also enable you to withdraw the entirety of your pension, either as a lump sum or a series of withdrawals, subject to income tax above the first 25% (the tax free lump sum).
However, bear in mind if you withdraw too much from your pension in one go, it could tip you into a higher income tax bracket. For example, let’s say your pension is worth £100,000 and you choose to take the whole lot as a lump sum to spend or invest as you wish. The first £25,000 would be tax-free, while the remaining £75,000 would be treated as income for that tax year, pushing you into the higher-rate tax band for the year. You also need to factor in any other taxable income that you may receive.
On a positive note:-
- Tax free growth Pension growth – profits made within the pension fund are free of capital gains tax
- Tax relief on contributions – you will receive relief on money paid into a pension, up to the rate of tax which you pay on your salary. So, if you’re a 40% tax payer, you will receive 40p in every £1 contribution in the form of tax relief, making pensions very attractive (subjection to certain restrictions).
- Inheritance tax planning (IHT) – The abolition of the 55% death tax charge is currently being phased out, this making pensions a very useful investment vehicle to help pass wealth between loved ones on death, without the need to pay IHT.
Pensions on the whole are now much more liquid/tax efficient than they ever were in the past, in many cases, funding pensions is actually more tax efficient than paying into ISA’s, especially for those with 40% and 45% tax rates. Like any investment vehicle, there are complexities that need to be considered and proper advice should be taken before making any decisions.
Michael has concerns for career people entering marriage without a pre nup in light of the pension liberalisation of 2015. He says, “ Most divorce settlements focus on need but in the past the nature of pensions has permitted for arguments that a pension created pre marriage should not be touched. Now I can see that a fund of up to say £100,000- £200,000 created before the marriage might easily be made the subject of order, probably share orders, on the basis it can be used to meet a marriage created need regardless of it having been created long before the relationship. A pre nup is a must, I suggest, for anyone entering a marriage once they have created a career with a pension fund.”
Michael is issuing a newsletter in February with an article about pensions in divorce. Please e mail to request a copy.
For more telephone 01606872200, e mail Michael.firstname.lastname@example.org or visit www.stonehewermoss.co.uk