Make the most of your cash, say Gillian Crandles and George Martineau
DIVORCE is a traumatic time for all involved. Dividing the assets of two parties can be difficult – but with the right advice, a solution can generally be found to satisfy both parties. Recent changes to pensions legislation, which makes them much more than just a tool for retirement saving, can help considerably.
The reason for this is the increased flexibility. Scottish law dictates the general principle that the assets of the marriage should be distributed fairly between the two parties, with “fair” being treated as equal in the absence of special circumstances (which might include assets brought into the marriage, rather than acquired during it). But often the economic needs of the two parties are quite different. The flexibility gives those of us working with the parties more creativity to help find a solution.
The changes come in two main groups, with the first set applying to how people can spend their pension during retirement. So-called flexi-access drawdown means that from April anyone over 55 will be able to take money out of their pension pot as and when they wish. In other words, instead of drawing on a pension in fairly rigid yearly amounts, they will be able to take whatever proportion they want in lump sums or as steady income (remember, in most cases, 75 per cent of a pension is susceptible to income tax – the more someone takes out in any year, the greater their tax bill).
The second set of changes applies to how pensions can be passed on at death. The previous framework meant crystallised pension funds (those where the retiree had started drawing on savings) faced a punitive 55 per cent tax charge when passed on to anyone other than a spouse, civil partner or dependent children. That tax charge will be abolished this year, making pensions a very attractive method of passing assets between generations (for those who die before 75, the beneficiary doesn’t have to pay any tax when they draw on the pension; for those who die aged 75 or older, the beneficiary pays tax at their marginal rate). As a pension can now be passed on to someone outside of marriage, that can be attractive for those moving out of a marital relationship. Most importantly, whenever part of a pension is transferred to another party in a divorce settlement, the beneficiary can avail of the new pension rules as if that pension had been built up in their own name.
So where would these changes potentially benefit someone in a divorce situation? Often, the key priority for divorcing parties is to ensure each of them is left with a suitable home. The greater flexibility in drawdown now means anyone with a pension has access to a lump sum in their mid-50s, allowing them to use some of that money to reduce the immediate financial burden of buying a new property. If they are younger than retirement age, the pension gives them the peace of mind that should they need to increase their mortgage burden now, they have assets to help pay this off in the future.
The removal of the tax burden on passing on a pension gives people generally – not just divorcees – greater flexibility in how they use that money. For older retirees, where the pension isn’t likely to be drawn down in its entirety during their lifetime, that pot of savings has now become an important tool that can be used to pass on money to children and grandchildren. For divorced individuals going into further marriages where additional or stepchildren might come into the equation, diverging obligations to the next generation may emerge. Each party can therefore choose to pass on their pension money after their death to whomever they wish.
For the owner of a big pension, splitting the pot on divorce can be useful as it lets them reduce their pension assets if they are getting dangerously close to the pension lifetime allowance (currently £1.25 million).
Dividing up a pension can be very complicated and for splitting defined benefit or final-salary pension schemes, we often recommend consulting with an actuary to properly value the pot. However, anyone in marital breakdown with significant financial assets needs the benefit of precise financial advice as well as expert legal counsel. With the input of both, these new pension changes can help people facing divorce make better, more flexible choices as to what assets they need, and help both parties ensure they have the resources to meet their changed circumstances.
• Gillian Crandles is a partner with Turcan Connell, and George Martineau a financial planner with Turcan Connell Asset Management www.turcanconnell.com