How could the abolished LTA affect divorce and inheritance?

This article is part of
Guide to pension tax and the Budget

How could the abolished LTA affect divorce and inheritance?
The abolition of lifetime allowance means that in a divorce, pensions may become more valuable than other investments. (Mikhail Nilov/Pexels)

Besides a matrimonial or family home, pension savings can be one of the most valuable assets to consider when it comes to both divorce and inheritance.

And in a surprise move that saw chancellor Jeremy Hunt not increase, but abolish, the lifetime allowance in the Budget, pension pots could become even more valuable than before.

“The change in the tax rules may encourage more people to put money into their pensions over the course of their marriage, and so upon divorce the pension may be relatively more valuable than other investments,” says Sarah Higgins, partner at Charles Russell Speechlys, a law firm.

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“Therefore, pension sharing orders may become more likely as pensions may be disproportionately valuable, meaning that it is not possible to offset the value of a pension share with other assets.”


Pension sharing reports that have been made, but not finalised, may also have to be recalculated because of the new rules, says Higgins.

“For separating couples, the spouse with the pension now has a more valuable asset on a net basis. This means that the amount payable to the other spouse is likely to increase in the case of a divorce.

“If an order has been made as a result of a pension sharing report that assumed an LTA tax charge, there may be circumstances in which the order could be looked at again – but this is very speculative at this stage.”

Tapered annual allowance still in place

While the lifetime allowance is being abolished, the minimum tapered annual allowance, although it is being increased to £10,000 following the Budget, will remain.

“For the majority of high and ultra high net worth earners that I act for, there is tapered relief on the annual allowance that has encouraged them to invest their money for retirement in more tax-efficient ways than pensions,” says Sarah Ingram, a partner in the family team at law firm Winckworth Sherwood.

“The government’s latest proposed changes will, in my opinion, not entice the majority of HNW earners back to investing more in their pensions as the proposed increases will not be that significant for them.”

Pension debits without the lifetime allowance

Although the tapered annual allowance may put a limit on savers reaping the benefits of the LTA being abolished, Ingram describes the policy change as a positive step for older spouses with large crystallised funds who have had to pay out, or are going to pay out, under pension sharing orders.

“It now offers them a better opportunity to replenish their pensions without the risk of exceeding the lifetime allowance,” Ingram adds.


“Under the current rules, where one party has had to transfer over a share of their crystallised funds to their spouse on divorce, that debit did not generally decrease their overall LTA total [used], leaving them less opportunity and time to replenish their funds without the risk of a 55 per cent charge if taking a lump sum above the LTA limit.”