As a divorce and family lawyer whenever a new client approaches me for advice on reaching a divorce settlement with their ex I find myself reminding them what a valuable asset a pension is. A pension is often the second most valuable asset anyone will ever hold (next to their house) and the older you are, the longer you’ve been paying into a pension, the greater the value.
Why is this important? Well, when a couple separate all of their assets, whether held by them jointly or individually form part of the matrimonial pot to be divided. That means any pensions held by the parties will need to be valued and considered.
Recent changes to the state pension and rules on when and how you can take your personal pension have significant implications for anyone going through divorce now and trying to reach a financial deal.
The new “simplified” state pension system which will be introduced for all individuals who reach state pension age on or after 6 April 2016 will combine the basic state pension and the state second pension into a single tier pension.
The potential advantage of the new flat rate pension is that it will remove the need for substitution of national insurance records from a spouse which will benefit people who have had significant periods of low earnings or employment gaps, particularly women and carers.
Pensions were also heavily taxed upon death, but that charge is being abolished.
Since April 2015, anyone over the age of 55 has been able to take money out of their pension pot as and when they wish instead of having to buy an annuity. This means access to lump sums, although of course there may be tax implications depending how much is taken.
There are a number of consequences when it comes to divorce and reaching a divorce settlement:
- Access to cash
When dealing with marriage breakdown and divorces, this new flexibility can be a valuable tool because some of that money can be used, for example, to fund the purchase of a new property which can help to reduce the immediate financial burden of a relationship breakdown. - Devaluing the fund
Of course, any decision to withdraw pension funds as ‘cash’ rather than leave the fund to grow could have a significant impact on value. Firstly, there’s the potential tax liability on the funds withdrawn, and then there’s also the consequence of withdrawing funds that if allowed to stay invested and grow for another 10 or 15 years might have far greater value and be of more benefit to one or both parties.
The division of a pension on divorce can be very complicated and expert financial advice should always be sought. A good divorce lawyer will help you understand what the options might be but ultimately a pensions actuary is likely to be required to help establish the true value of your, and your ex’s pension as part of a divorce settlement.
Nick Wiseman
Divorce & family lawyer, Norwich
