Divorce for solicitors

At Financial Fortress, we understand that you are experts in divorce law but when it comes to reaching amicable settlement and understanding of the financial bigger picture, there may be times you need extra help.  We hold the specialist AF3 qualification enabling us to take a holistic view of your client’s circumstances and we will collaborate with you in their best interests.  We can also assist clients rebuild their lives post divorce and will advise on purchase of a new home for example.

Whilst our pensions and divorce section is a simple summary designed to be of interest to clients, we have comprehensively listed more of the implications regarding pensions below:

Offsetting

• “horse trading” the total assets
• Transfer values normally used (ie:  after any Market Value Reductions although a solicitor could argue this is only a “temporary measure”)
• Danger of leaving one person with no accessible cash and the other with no retirement income, however ultimately up to you and the client
• Split ignores impact of tax, ie:  client who retains pension will be taxed on 75% of pension assets making it unfair, further adjustments may be argued
• Single tier state pension from April 2016 and pensions sharing will not be applied to it although existing or where enhanced, will be honoured.  Pension sharing will be possible with protected benefits in excess of the single tier pension (ie:  S2P etc)
• On a request from the member or the court, the DWP will provide a valuation of shareable pension rights

Earmarking

• Earmarking orders issued by the court but agreed beforehand
• Court would consider value of pensions accrued up to date of divorce
• Court would take a “global view”, ie: possibly earmarking just 1 pension not multiple
• Each order would require trustees to pay a specific portion of lump sum and income to other party when 1^st party takes benefits
• Earmarking can also apply to death benefits Overriding trustees discretion.  Any lump sums are free of IHT as deceased estate has no claim.  Any earmarked pension lost on death before retirement
• Dependents pensions payable before or after death cannot be made subject of earmarking orders
• State benefits including single tier cannot be subject to earmarking orders
• Timing when 2^nd party takes benefits will remain dependent on 1^st party
• If 2^nd party remarries, earmarking order would cease for pension benefits (but not death benefits)
• If 1^st party dies whilst in receipt of benefits, 2^nd parties benefits will stop and no spouses benefits
• Level of benefits tested against 1^st parties Lifetime Allowance not 2^nd party
• Where transfer considered, existing scheme trustees inform new scheme
• Tax position benefits paid after tax based on 1^st parties position and 2^nd party unable to reclaim.  Eg:  1^st party HRT and 2^nd party 0TP so inefficient
• 2^nd party has no control over investment
• Main advantage is earmarking lump sum death in service benefits

Pension sharing

Defined benefit

• Scheme could offer scheme benefits to 2^nd party and they could decide when to take benefits etc or free to transfer out
• Where scheme pension taken, would be constrained by scheme rules
• Offers a clean break
• 2^nd party has control and choice of investment, provider and timing of benefits
• 1^st party death would not affect 2^nd party
• 2^nd party free to remarry without loss of benefit
• 2^nd party restrained by scheme rules where remain
• 1^st party not involved in decisions
• 2^nd party taxable and tested against own LTA
• 2^nd party has benefits that could be left to dependents
• Benefits may not be same format, ie: scheme may offer a money purchase equivalent
• Or the “Pension credit” – ie: the order, could be transferred to another scheme or S32 transfer if 2^nd party does not make a choice.  Where 2^nd party fails to make a nomination, will be a S32 plan and legislation does not allow a personal pension
• Private sector schemes must offer 2^nd party the ability to transfer and at their discretion offer pension credits rights under their scheme
• Public sector, rights must be retained by the scheme and cannot be transferred out
• Even where scheme offers membership to 2^nd party (which is rare), can still transfer out
• Where unfunded public sector – cannot transfer out

FSAVC (Free standing AVC)

• Given a fixed value of the plan
• Could stay in plan (depending on rules and the order)
• Could transfer to another plan with same provider (unlikely as not accepting new business) or pension with another provider

State pension

• Pension sharing does not apply
• Could only apply if 1^st party has protected payment under the transitional arrangements
• If protected payment = yes, order only applies to excess over standard single tier pension
• Government will not pay a transfer value
• DWP will record a “shared additional pension credit”
• 1^st parties pension subject to a corresponding “pension debit”

Contracted out rights

• No special rules, therefore free to transfer out