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Tax implications of pension sharing

This article is part of
Guide to Pensions and Divorce

Ian Naismith, pensions expert at Scottish Widows, said there is no tax relief or annual allowance check with pension sharing.

At retirement, Mr Naismith explains there will be tax-free cash and taxed pension for them in the normal way. The transfer increases the value of their pension for lifetime allowance purposes.

Hannah Foxley, Chartered financial planner at The Women’s Wealth Expert, notes it is the lifetime allowance that can cause problems and be affected by pension sharing.

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A pension credit will count towards the lifetime allowance except where the pension came from benefits that came into payment on or after 6 April 2006, as they have already been tested against the lifetime allowance.

If a pension sharing order is made on benefits that have primary protection, HMRC must be notified and the protection reduced accordingly.

If it brings the value to below the lifetime allowance, Ms Foxley warns primary protection will be lost.

Careful consideration must also be given to enhanced and fixed protection as a credit received incorrectly will result in the protection being lost.

“Credits into a new scheme will result in the loss of enhanced protection but credits into an existing money purchase scheme will maintain the protection.

“However, subsequent relevant benefit accrual can result in loss of the protection and it is important to ensure that this does not happen.

“A pension debit will not result in a loss of enhanced or fixed protection for the donor but they may wish to revoke their protection in order that they can rebuild their fund after a debit has been taken.”

If a client decides to share their pension they will need to think about whether they wish to increase the size of the future contributions they make.

Ray Chinn, head of pensions and investments for LV, says the client may also review where their fund is invested to see whether they could improve the return they are currently receiving.

He said: “This will of course depend on a client’s risk appetite, when they intend to retire and how close they are to that point which is why financial advice is so important.”