Pensions and divorce
On Valentine’s Day this year I received not only a lovely card and flowers from my husband, but also an email from my financial adviser about a new specialist divorce service they were offering.
I assume the timing was some act of anti-Valentine’s rebellion, and sent to all clients (or at least the married ones), as opposed to a comment on the state of my marriage.
Divorce is a sensitive subject, and well known for being one of life’s most stressful events. Having a good financial adviser that knows the common planning pitfalls can help smooth out some of the financial stresses. Divorce lawyers are not always up-to-speed with the latest pension rules, as can be very apparent by some of the pension sharing orders that land on our desk which are simply not possible to implement. We even had a new earmarking order arrive in the last few weeks – a concept that was outdated well before A-Day, let alone in the light of pension freedoms.
Often the orders try to be too clever. We see requests for specific assets to be transferred or a set monetary amount (only permitted in Scotland), rather than a percentage figure. Or a simple total failure to acknowledge the pension is tied up in illiquid investments.
Pension sharing orders can only be applied to ‘shareable rights’. This is most rights held in most types of pension scheme, however a notable exception is beneficiary’s rights. Pre-freedoms this would only have applied to someone widowed, re-married and then divorced, or a child dependant who managed to get divorced before the age of 23 – so not that common. However, in the new world more and more adult nominees will inherit pensions from their parents, which could make up a significant chunk of their wealth. For example, a parent who dies in their late 60s or 70s could have a sizeable pot left to pass on to their children in their 30s or 40s which could easily dwarf their own pension savings. Last year the average age for divorce in the UK was around 44, so you may well come across divorcing clients with significant assets that cannot be shared.
If you’re familiar with pension sharing orders, you are probably aware of the difference between qualifying and disqualifying rights. Disqualifying rights are often seen as less valuable in the hands of the ex-spouse as there is no PCLS entitlement (nor ability to take UFPLS), as the original member has already taken the tax-free element (or had the opportunity to). Less well known is the fact that taking an income from disqualifying rights doesn’t trigger the MPAA, which could be an important planning consideration. Take the older husband/younger wife scenario who divorce at age 65/55. Mr is taking benefits so the rights are disqualifying. Ms needs immediate funds but is still working with decent employer contributions, so doesn’t want to restrict her annual allowance. In addition, any disqualifying funds from post A-day funds will give the ex an enhancement factor for their lifetime allowance.
Few divorce lawyers will know all these details and this is an area where you can really add value for your clients. Not that I’m hoping they’ll need it.