In July 2019, The Pension Advisory Group published guidance on the treatment of pensions on divorce
. This report has substantially changed the way in pensions are dealt with on divorce by emphasising the need for a Pensions on Divorce Expert to be instructed in many cases.
What will a Pensions on Divorce Expert help with?
The Pensions on Divorce Expert will produce a Pension Actuaries Report that considers a range of factors such as:
The type of pensions,
All benefits and risks,
The retirement age of the parties,
The length of marriage,
Any benefits lost from sharing, and
Any implementation charges the parties could face.
The Guidance on pensions was produced to formalise the guidance available to legal professionals when dealing with pensions and financial settlement. The emphasis is on the Actuaries Report to assist the legal professionals as to how the pensions could best be divided.
Do I need a Pension Actuaries Report?
In deciding whether a Pension Actuaries Report is required, the legal professional shall conduct an evidence gathering process to provide any details on:
The type of scheme,
Any former employment,
Any personal pension schemes,
Whether the pension is in payment or not, and
External or internal schemes.
Once the legal professional has been given this information as part of a full and frank disclosure both parties can then determine whether a pension on divorce report is required.
If there is pension’s disparity between the parties then a Pension on divorce Expert could be instructed by both parties as a Single Joint Expert to decide how to equalise capital or income. It is important to establish that the Pension on divorce Expert’s role is not to decide which method of pension division is appropriate but to set out the options available to equalise any present disparity.
When considering the types of pension there is a distinction between whether the case is a needs or sharing basis;
Needs Principle – This is the most common basis where the Court view that the assets held by both parties do not exceed the party’s needs and must try to divide assets to meet needs.
Sharing Principle – This is where the assets held by the parties do exceed the party’s needs. It can be appropriate in these cases for the Court to apportion the pension on duration of the marriage.
How can a pension be shared?
If the parties agree to a financial settlement there are three methods of pension division; pension attachment orders, pension sharing orders and offsetting;
Pension Attachment Order – This could involve an attachment of periodical payments, secured periodical payments of lump sum payments in order to provide the both parties with income.
Pension Sharing Order – This allows the Court to direct those pension providers to split the pension as the Order provides, into separate pensions assigning to each spouse their independent pension rights.
Offsetting – This is where instead of one party receiving benefits of the other parties’ pension, they substitute this for a different assets so the party retains their full pension. Offsetting is commonly used where one party wishes to remain in the family home. However, offsetting can be complex due to the difficulty of making a comparison between a pension and a capital asset.
Income or Capital?
One aspect which is often incorrectly recognised is whether the pension should be treated as income or capital. A Pension Expert can advise on whether the pension should be treated as income or capital. The Guidance on pensions outlined that the pension should be treated as capital if the parties have the ability to withdraw a sum without being subjected to tax. Whereas, the pension should be treated as deferred income if the parties do not have the ability to withdraw any sums. Alternatively, if the pension does not fall within either of above, the pension should be treated as current income as the pension shall be already in payment.
Legislation which drastically improved pension’s flexibility was seen with the introduction of the Taxation and Pensions Act 2014. This enabled individuals of a pensionable age (currently 55) to withdraw a sum of their funds tax free before paying income tax on the remainder. The legislation introduced 3 new schemes to withdraw income from pensions;
Flexi-Access Drawdown – This withdrew a cap on the amount on income which an individual could withdraw from a private pension.
Uncrystallised Funds Pension Lump Sum – this allows a single lump sum to be withdrawn from the uncrystallised Defined Contribution pension.
Money Purchase Annual Allowance – This means if you pay over £4,000 per annum into a Defined Contribution pension you will trigger the money purchase annual allowance and be taxed at the marginal rate on the excess. Under this scheme it is possible to withdraw the entire tax free lump sum and not trigger the scheme by not withdrawn any income.
State Pensions on Divorce
Old Age State Pension is not something which can be divided on divorce. However, there is the possibility for individuals to substitute previous National Insurance contributions by their spouse for their own providing their spouse has a higher state pension. Conversely, New State Pensions cannot be shared or substituted for previous national insurance contributions.
The fundamental message throughout the guidance is to educate professionals that pensions on divorce should not necessarily be equally split or disregarded. It is apparent that the legislation on pensions has significantly changed and that due to the complexity of pension sharing it is important to involve a Pension Expert in complex cases or generally where the pension CETV is over £100,000.