Chancellor George Osborne’s pension changes could benefit couples going through a divorce. Stuart Walker, financial planner at Johnston Carmichael Wealth in Aberdeen explains how
The legalities surrounding divorce are complex and dividing up the assets of a married couple can become complicated, no matter how amicable the separation.
Recent changes to pensions, however, have proven beneficial for divorcing couples.
Historically, the division of property investment has taken priority during divorce settlements.
But the importance placed on the sharing of pensions is expected to increase as more people become aware of the changes and the value of their retirement savings.
Under the pension reform, the UK Government has introduced flexi-access drawdown – offering anyone over the age of 55 the opportunity to withdraw money out of their pension fund, whenever they require to do so.
This change gives savers the option of withdrawing a proportion of the fund as lump sums, or taking it as a steady income.
Flexible access offers divorcees the choice of withdrawing lump sums from the age of 55 up, potentially easing the financial burden of buying a new property after moving out of the marital home.
If younger than retirement age, the pension can offer the assurance that they will have the funds in the future to pay off an increase in mortgage payments if this is required.
The new legislation has also seen major changes applied to death pension benefits.
Savers can now decide who inherits their pension, irrespective of what age they die.
Previously, it had been possible to pass a pension on after death to only spouses, civil partners and financially dependent children under the age of 23.
The fund can now be transferred to a nominated beneficiary outwith marriage, which should prove a welcome change to those leaving a marital relationship.
If a divorcee enters another marriage at a later date, this may lead to additional children or stepchildren who would be entitled to a share of any pension pot as part of their inheritance.
Under the new rules, the divorced party can choose to pass on their share of a pension fund from a divorce after their death to whoever they wish, including dependants from another marriage.
In addition to this increased flexibility, the government has abolished the 55% tax charge which had previously applied to pensions whenever they were passed on to anyone other than a spouse, civil partner or dependent children.
Divorcing parties can take advantage of a reduction in tax when passing on their share of the pension fund following a divorce.
While the pension reform provides greater control and flexibility for many people, it is important that professional financial guidance is sought.
This will make sure that advice is tailored to suit the circumstances surrounding the divorce settlement and is of both short- and long-term benefit to the individual.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
It represents our interpretation of current and proposed legislation and HM Revenue and Customs practice as at the date of the publication.
This may change.
The importance placed on the sharing of pensions is expected to increase