Pensions and divorce: Lawyers and advisers must work together

TWM Solicitor’s drive to co-ordinate advice is a reflection of the huge changes to pensions in recent years, including those to the state pension and rules about removing cash lump sums from private pensions.

In April 2016, new state pension arrangements came into effect combining the previous two-tier arrangements into a single flat-rate weekly payment and provisions are now in place to increase the state pension age.

This will rise for both men and woman to age 66 by October 2020, age 67 by March 2028 and eventually, age 68 for those born on or after 6 April 1978. We need to keep these changes in mind when we are advising clients about their financial futures.

There have also been changes to private pension schemes, one of the most significant being the government's reforms that created new flexible access options for individuals with defined contribution (DC) pension savings.

We need to look a lot closer at the scheme and for that we need the assistance of financial advisers specialising in pensions or pension actuaries.

As long as their scheme permits it, once they reach age 55 individuals can now access their DC fund in full, designating funds as available for flexi-access drawdown or making cash withdrawals from the fund in the form of one or more lump sum payments.

The tax consequences of taking a lump sum payment can be significant as it could result in them paying higher-rate tax in a particular tax year and so appropriate tax advice should always be sought.

These are only the highlights of recent changes and to be able to identify the full range of issues arising from pensions and divorce we need significant input from other professionals.

There are a vast number of schemes on the market and the starting point in divorce is to request an up to date Cash Equivalent Value (CEV) for each pension fund.

We exchange this information with the other spouse’s legal representatives with a view to valuing and comparing the parties’ respective pension positions. But what does the CEV really tell us?

In all honesty, not a lot. It gives no real indication of the level of income available to that person on retirement.

Also, the way in which a CEV is calculated for a Defined Benefit (DB) scheme is fundamentally different to a DC scheme; having a similar CEV does not mean that their future pensions are similar which means that we cannot reliably compare their capital values.

We need to look a lot closer at the scheme and for that we need the assistance of financial advisers who specialise in pensions, or pension actuaries.

A number of questions will arise about how to deal with the pensions on divorce. Quite often parties will have a number of pensions and, as a lawyer, I cannot advise my client as to whether it is better to share in just one scheme or take shares from a number of schemes.

There is then the issue of the liquidity of the assets. A cash settlement is not the same as receiving or retaining pension assets but often parties want to offset.

Since the changes have come in allowing greater flexibility in taking cash out of pensions, clients often want to consider their options in respect of accessing their pensions.

For example, if a member's existing pension scheme does not allow flexible access, a member can transfer their benefits to another scheme or provider in order to take advantage of the new rules (and this includes members of private-sector DB arrangements).

It may be financially beneficial to transfer their pension arrangements to take advantage of flexibility and liquidity prior to a pension share being implemented but both parties need to be fully advised on the pros and cons and the effect of any such transfer on potential pension shares and income on retirement.

After the family home, pensions are often one of the largest assets to deal with upon divorce.

While parties might be reluctant to incur the cost of additional advice, the benefit cannot be underestimated. It’s all too easy to regret a bad decision later on when it cannot be rectified.

Financial advisers and lawyers need to work together from the outset. The clients need to know the options available to them with their pension assets on divorce and be advised about the timing of the process. Thoughtful pension planning is critical to future financial security.

Caroline Keeley is a senior associate in the family team at TWM Solicitors LLP