From 6 April 2015, new pension reforms were introduced in the UK, which gave some pension holders greater freedom over how they spend, save or invest their pension pot.
Whilst the headlines were quick to predict that many people were set to treat themselves to luxury holidays, fancy cars and home improvements; here at Thorntons, we have considered the impact the reforms will have on an important area which so far havebeen overlooked: separation and divorce
In Scotland, as part of the divorce process, all matrimonial property is valued at the relevant date, which is usually the date the couple separated. This includes any pension entitlement that either spouse has accrued between the date of marriage and the date of separation.
Once the items of matrimonial property have been established and valued, the next stage is to negotiate how those will be divided. The law states that matrimonial property will be shared fairly and in the majority of cases, it will be shared fairly when it is split equally; unless special circumstances apply.
More often than not the assets of greatest value are the family home and pensions, and in many cases one or both parties may be keen to hold onto the family home, particularly where there are children involved.
Often, a settlement will be agreed using a combination of off-setting the various assets and pension sharing.
The new Pension reforms will provide greater flexibility for those going through the divorce process who are already 55 or over, or those close to 55, although it was announced recently that the sage at which you will be able to draw your pension benefits will increase to age 57 with effect from 2028.
We regularly find that, during a divorce, each spouse is keen to ensure that they can each afford a home of their own following settlement. With the changes allowing individuals the option to release funds from a pension pot early, it may help relieve the financial burden of finding the deposit for a new property.
For those not quite in the age range to benefit from the changes straight away, it may make them more comfortable with the prospect of taking on a greater mortgage burden now, in the knowledge that they can access funds from their pension at a later date to reduce that mortgage, without having to wait until retirement.
Whilst we acknowledge that an individual's pension is there primarily to provide an income in retirement, the new pension changes do provide people with greater flexibility in terms of their finances, which in turn can result in divorce lawyers being more creative in framing settlement proposals.
So what were the Pension Changes and who will be affected?
Those affected will be individuals who are to receive a share of a 'Defined Contribution' pension or who are offered a transfer away from a 'Defined Benefit' pension.
This is because the new rules affect people with 'Defined Contribution' pensions; these are typically Personal Pensions, Stakeholder Pensions or Additional Voluntary Contribution schemes (AVCs). In this type of pension the amount payable in retirement is linked to the investment performance of the fund accumulated during a person's working life rather than being linked to their Final Salary or a Career Average salary, i.e. 'Defined Benefit'.
Prior to April 2015, in most cases, the amount that could be drawn from a Defined Contribution pension as an income was limited by rules laid down by the Government. However, from 6 April 2015, these rules were removed and there will no longer be any restriction on the amount able to be withdrawn after the age of 55.
It will still be possible to take a lump sum of up to 25% of a pension tax free. The remaining pot can be accessed without limit but income tax is payable on the amount withdrawn at the individual's highest marginal rate.
Divorce is a complicated area and where pensions are involved, the need for specialist legal and financial advice from the outset is even greater. Whilst the pension reforms will provide greater control and flexibility for many, it is important that bespoke advice is obtained, to ensure that whatever settlement is considered will suit each party's changed circumstances both now and in the future.
Lynne Sturrock is a specialist Family Law Solicitor and Susan Bennett is a Chartered Financial Planner at Thorntons Investment Management Ltd, with a specialist interest in pensions. We are always delighted to talk without obligation about whether we might meet your needs. Call Lynne on 03330 430150 or email lsturrock@thorntons-law.co.uk
Thorntons Investment Management Ltd is Authorised and regulated by the Financial Conduct Authority.
Any information concerning the tax treatment of an investment is based on our understanding of current Inland Revenue rules which may be subject to future change. Tax advice is not regulated by the Financial Conduct Authority.