In the last decade, retirement planning in the United Kingdom has undergone significant changes, particularly with the introduction of pension freedoms in April 2015. These reforms have provided individuals with greater flexibility and control over their pension savings. However, alongside these freedoms comes the need for careful consideration, especially when looking at how pensions are dealt with on divorce/the dissolution of a civil partnership.
Understanding Pension Freedoms
Pension freedoms introduced by the UK government have given individuals greater choice and flexibility in how they access their pension savings. These freedoms include:
- Flexi-Access Drawdown – allowing individuals to withdraw money directly from their pension pot at retirement age as and when they choose, subject to certain tax implications.
- Tax-Free Lump Sum – allowing individuals to withdraw up to 25% of the value of their pension pot as a tax-free lump sum upon reaching retirement age.
- Cash Withdrawals subject to income tax.
Although the full range of pension freedoms only apply to defined contribution pensions (not Final Salary/defined benefit schemes).
Pension Orders that can be made on divorce/dissolution of a civil partnership
There are four things that can be done with pensions:
Nothing – leaving everyone with the pensions they have in their own names. This is usually appropriate if the couple are of a similar age and have similar pensions, both in terms of value and type.
Pension Sharing Orders – this takes a proportion of one person’s pension and pays this to the other person. This is still done within the wrapper of a pension but means that going forward there are two separate and distinct pensions that can be invested and accessed entirely independently.
Pension Attachment Orders – this directs the pension provider that part of a pension should be paid to the other person once the pension starts to pay out. These types of orders have to specify whether they are being applied to the tax-free lump sum element, regular monthly pensions payments or lump sums that are payable on death. Vitally it does not separate out the pensions so they remain linked.
Offsetting – where one person keeps a large amount of pension assets in exchange for the other keeping a larger proportion of some other assets like non-pension savings or a property.
The Implications of Pension Freedoms on divorce/dissolution
In situations where the couple are not of pension age there is no immediate impact or concerns.
For those considering pension attachment orders there may need to be additional agreements setting out how the pension will be accessed in due course, to ensure that the pension is drawn down in the way that the orders assume. This is on top of the more general considerations, around the appropriateness of this type of Order given that if the pension member dies the pension dies with them and may automatically cease, potentially leaving the former spouse without the expected pension income.
For those couples who are of retirement age (or are close to approaching it), it is important to ensure that any draw downs from pensions correlate to what has been agreed within a divorce/dissolution of a civil partnership. Sometimes it is appropriate to seek legally binding confirmations from the person who holds the pension asset that they will not draw down on their pensions (in any way) until a financial agreement has been reached, approved by the Court and implemented.
What if we divorced/dissolved our civil partnership before pension freedoms were introduced?
You still need to be aware of these – how they impact on the orders that were made in your divorce/dissolution of your civil partnership as pension freedoms will apply when you become eligible to access the pensions. This is especially important if you divorced prior to 2000, as only pension attachment orders were available at that time.
To illustrate the complexities of this let’s consider the case of John and Sarah:
John and Sarah are aged 53 and have divorced. John was a manager at a supermarket and Sarah was a nurse until they had children. John has a much more significant pension, and a pension attachment order was made in respect of their finances upon divorce confirming that 20% of John’s tax free lump sum should be paid to Sarah and 25% of the regular monthly pension income.
Under pension freedoms, John now has the option to access his pension savings through flexi-access draw down or make cash withdrawals as he sees fit. There is nothing stopping him choosing to take all of this pension out in cash, therefore, avoiding the income part of the order that has been made. If he does this Sarah will not receive a larger payment as her entitlement is limited to the “tax-free” element which remains fixed at 25% of the total pension pot, no matter how much is actually taken out. This is likely to leave Sarah in a much worse financial position than was expected.
Contact Hedges Today
If you are concerned about how pension freedoms may affect you, come and speak to our specialist Family law team who have a wealth of expertise dealing with the complexities of pensions, whether you are going through a divorce/dissolution now or have a pension order from some years ago.
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