A brief overview of the pension reforms and how they will affect divorcing couples

Pension changes made in the 2014 budget will provide pension holders (other than those with unfunded public sector pensions) with much greater flexibility as to how and when they can draw their pensions. This is a very brief explanation of the changes that may affect divorcing couples. Pensions are very complex and the author is not a financial advisor. She is a solicitor specialising in relationship breakdown. If more detailed advice is required in relation to the pension changes, you will need to speak to a financial advisor.

In general terms, pension holders will be able to withdraw the whole of their pension fund in one, or a series of lump sums. This is a fundamental change and will affect the way pensions are dealt with on divorce in a number of cases.

After the age of 55 and post April 2015 pension holders can make direct withdrawals from their pension. The first 25% will be tax free, with the remaining withdrawal being taxed at the marginal rate. Pension holders are again advised to seek specialist advice as to whether to make such a withdrawal as they could put themselves into a higher income tax bracket. Also different pension schemes will have different rules which will need to be checked. For example some providers will limit withdrawals to one lump sum. Fees for such withdrawals can also be charged and need to be fully investigated before decisions are made.

When couples divorce the first stage for considering financial matters requires both parties to disclose full details of their financial circumstances together with documentary evidence. This includes pensions. The parties are required to provide details of the cash equivalent value of their pension. In the past pensions have not been treated in the same way as savings or an interest in a property. The latter are examples of realisable assets ie savings can be encashed, properties sold. In such circumstances the court has access to a pot of money that can be distributed to meet the needs of the parties. Pensions, unless in payment already in which case they are an income stream rather than an asset, have not been realisable and have been treated as a future interest. Under the new rules extra consideration will need to be given to the age of the parties and whether they are able or will shortly be able to withdraw the pension as a lump sum. The pension can be treated as a realisable asset along with the savings and investments, properties etc. This will provide the court and parties with greater flexibility as to how to meet the parties’ needs.

by Rebecca Woodley from the Downham Market office