Common issues faced by divorcing clients

Therefore, when deciding not to make any order regarding matrimonial assets, a court will consider all the circumstances of the particular case, according to Nigel Cayless, associate director at Sackers.

He says: “This will involve ascertaining all of the assets that are available – including pensions – and distributing those assets. 

“The court’s overall approach is greatly influenced by equality – at least regarding assets built up during the marriage – and fairness.”

So what are some common issues that clients should be aware of when going through a divorce?

In terms of the lifetime allowance, losing pension scheme benefits through pension sharing can result in the loss of valuable tax protections Nigel Cayless

Pensions tax issues

For couples where passing on their pension as part of their inheritance tax planning, it may prove more tax-efficient to equalise assets between divorcing spouses by allocating other assets – like the ones that do not have favourable IHT treatment – first, suggests Paul Falvey, tax partner at BDO LLP.

He says: “This is a complex area: a recent guide on the treatment of pensions on divorce by the Pensions Advisory Group runs to 176 pages and only skims the surface of the potential tax issues. 

“The individual circumstances of the couple and their assets will dictate what options are available and what pitfalls could arise with pensions, for example, some defined benefit schemes will be highly valuable but offer very little flexibility.”

To avoid any potential tax issues, the most important task is to identify and value all the assets the couple have, including future entitlement to the state pension, what tax issues could arise with each, suggests Mr Falvey.

He says: “For example, whether lifetime allowance protection of any type is in place, what flexibility there is around their pensions and the current ages and income and capital needs of each spouse. 

“Then, with input from tax and pensions experts, couples can negotiate asset allocations, including pensions, that are tax-efficient…it may not always be tax-efficient or possible to pursue a completely ‘clean-break’ settlement where pensions are involved.”

While Victoria Walker, family solicitor and partner at Moore Blatch LLP, says: “Pensions are complex assets, for women especially, as they often take time out of their careers to have children, meaning their pension can be worth less than their husband’s.  

“Additionally, pensions are one asset spouses often do not want to share and will, therefore, offer a lump sum in lieu of a pension share.”

She continues: “However, the actual value of a pension is often more than the monetary figure so agreeing to a lump sum could mean one spouse loses out.” 

She adds: “For this reason, it is important to get a pension actuary involved...if there are other complex assets like businesses, clients should engage accountants to help come to an accurate valuation.”

In terms of rebuilding a pension post-divorce, clients' future pension savings will generally be subject to the standard annual allowance rules, where the maximum amount of pension savings each year with the benefit of tax relief stands at £40,000.

Mr Cayless warns: “Care should be taken by a member of a defined contribution scheme not to trigger the reduced money purchase annual allowance of £4,000 – rather than £40,000 – by cashing in pensions to release additional liquidity for the divorce ‘pot’.”

The lifetime allowance, the limit on the amount of money that can be saved in a pension without triggering a tax charge, as announced in the Budget 2018, increased to £1.055m, from £1.030m, for the 2019 to 2020 tax year.

Mr Cayless continues: “In terms of the lifetime allowance, losing pension scheme benefits through pension sharing can result in the loss of valuable tax protections where an individual’s pension benefits exceeding the allowance, such as fixed protection, individual protection and primary protection.

“Individuals with fixed protection in respect of the lifetime allowance should be aware that if they receive a pension credit as a result of a pension sharing order after the effective date of the fixed protection, they may lose their fixed protection as a result.”

He adds: “Whether or not an individual with one of the LTA tax protections can rebuild their pension rights after they have been reduced due to a pension debit depends on the type of the individual’s arrangements and on whether they have lost that tax protection as a result.

“Care should be taken to ensure that the reduced money purchase annual allowance is not inadvertently triggered where an individual wishes to make future pension savings in excess of £4,000 a year.”

Other issues

Many women fall into debt because they simply do not have the savings or financial resilience to manage life’s income and expenditure shocks, so women can be particularly vulnerable if they face situations like job loss, divorce or large unexpected household bills.

Mr Neale says that apart from the need to pay very close attention to the legal requirements, there are a few particular issues which often arise.

"Under pension sharing, the party whose pension is the subject of the pension sharing order has a 'pension debit', and the other party a corresponding 'pension credit'," he says.

"To the latter party, the trustees may offer an 'internal transfer': technically, this is a discharge of the pension credit by creating appropriate rights in the same pension arrangement."

More commonly, however, he says the trustees will offer only an 'external transfer' - discharge of the pension credit by paying a transfer value to another pension arrangement. 

"This will generally require the cooperation of the holder of the pension credit, for example in nominating the receiving arrangement. For different reasons, this is not always forthcoming," he adds.

victoria.ticha@ft.com