The recent announcement by the Chancellor to release the pension cap and the annual contribution limit was seen by many as a tax break for the rich.
However, the major beneficiaries of this change was those people in the Public Sector with Senior Roles such as Headteachers, Consultants, GP’s and Civil Servants, most of which are on either final salary or average salary pension schemes.
Why? Because many had already reached the maximum pension allowance and their marginal rate of income tax was becoming such a disadvantage that many had decided to retire.
So it is a good thing that you can add more to your pension fund and benefit from this in retirement – for many yes, but for those contemplating divorce or more particularly those that will be in receipt of a pension sharing order, the benefits are not so obvious.
With over 1/3 of the working population in the public sector, with the prevalence of final or average salary pension funds being prominent in the Public Sector it is not surprising in divorce that the pension is often the major element of the financial settlement.
The number of times we have seen, more often than not the wife in receipt of a large pension sharing order running to many hundreds of thousands of pounds is more common than you think. BUT, very few lawyers or even fewer pension advisors actually tell you that the devil really is in the detail of the pension funding rules themselves. We pride ourselves in giving fair advice to our clients and increasingly that advice is not to take a pension sharing order or at least to consider fully the implications of doing so. So let us pose a few questions, the answers for which might surprise you:
The value of my pension sharing order goes into my estate if I die early?
Nope – if you die, the vast majority of your pension sharing order is returned to the Chancellor of the Exchequer and your estate receives little or no benefit.
My pension is liquid and I can move it?
Nope – scheme rules are clear and different for each scheme. You cannot move funds in most schemes and they are certainly are not liquid. Contrast that with you taking a larger percentage of the family home in the divorce settlement and not a large pension sharing order. Your property is liquid, carries little risk and is yours to do what you want with
If I die before I can draw my pension then my will provides for the money to be distributed?
Nope – if you die before you can draw from the scheme, you get nothing. Just think if at 40 you took a £200,000 pension share and died at 55 – your divorce settlement in this case was not worth a great deal.
So I can draw my pension at 60 ?
Nope – all schemes have different rules. For example, the Fire Service pensions have three schemes and the earliest draw down for the annual pension in one of these schemes is 67 ! – yes 67.
So in summary, the new requirements allow more money to go into the pension which gives a larger part of any divorce pot being attributable to the pension itself. On face value, good news but unless you can get at it, then it is worth very little.
Each case is very different and needs to be considered, so but don’t just think a big pension sharing order means a great settlement. We would trade a pension for cash in a property NOW every day of the week because you just don’t know what might happen and with a property, you can leave it to your kids or even the RSPCA.
About Peter Marples
Peter Marples – Director of Fair Result and qualified accountant, with the determination to change the way divorce is transacted. For further advice on financial settlements and navigating divorce, use the contact details below: