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Why details matter for drawdown splitters

2 months ago

The first Monday back after the Christmas break has come to be known as ‘Divorce Day’ – this year falling on 4 January. This is the day when divorce specialists report the most enquiries in any given year, but in 2021 the boom is likely to have been bigger than ever for obvious reasons. It’ll be a little while until we get the stats relating to this January’s enquiries but, back in September, Citizens Advice reported views on its divorce pages as up 25% compared to the same time in 2019.*

We also have no-fault divorce on its way – the Divorce, Dissolution and Separation Act 2020 is now law, although not expected to be introduced until autumn this year. With more divorces overall, and potentially easier divorces too, there is more potential for assets to be split less than equitably, especially when it comes to the tricky area of pensions. Many divorce lawyers will not be experts in this area, and knowledgeable financial advisers can make a big difference to outcomes for the parties involved.

There are many nuances when splitting pensions: too many to go into here. But a recent case has brought to my attention an often-missed point. On a pension-sharing order – whether a consent order or a financial order – it is only possible to state a percentage split of the pension that is awarded to the ex-spouse. (An award stated in pounds rather than a percentage is only permitted in the Scottish courts, not the rest of the UK.)

Where the member is in partial drawdown, it is not possible to state whether crystallised or uncrystallised assets are to be transferred, or what proportion. This will be of increasing relevance, as another trend we have seen is the rise of the grey divorce – or the ‘silver splitters’, if you prefer. When older couples get divorced, the odds of them having already taken some benefits will be increased. Uncrystallised rights are worth more to the ex-spouse, as they still have the right to take tax-free cash. But depending on their circumstances, crystallised rights could be valuable too. Where the member has already taken benefits, the ex-spouse gets a ‘disqualifying pension credit’, which has no tax-free element, but does have the advantage of them being able to take income without triggering the money purchase annual allowance (MPAA).

When a pension administrator receives a pension-sharing order and the member is partially crystallised, the law is silent as to how the pension debit should be split between crystallised and uncrystallised rights. In most cases, they are likely to take it proportionately from both pots unless instructed otherwise. However, if both member and ex-spouse agree, then the option to take all from one or the other pot as appropriate should be available. This should be taken into account before the agreement is reached, as who gets the tax-free element may well be important.

*bbc.co.uk/news/uk-england-54117821

This article was previously published by Sipps Professional

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Lisa Webster
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Lisa Webster

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Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.

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