Divorce and pensions – some important changes

From 6th April 2016, the current system of Basic State Pension, Additional State Pension and Graduated pension will be scrapped and there will simply be a Flat Rate State Pension.

The maximum amount payable under the flat rate state scheme will initially be £155.65 per week. This is the end of contracting-out for defined benefit schemes (i.e. public sector schemes). Everyone will pay the same National Insurance after 6 April 2016 whether employed or self-employed.

For a divorcing couple, this means that after 6 April 2016 it will no longer be possible to share the Additional State Pension with your ex-spouse if you reach state pension age on or after 6 April 2016, unless the petition for divorce was issued before 6th April 2016. When the Additional State Pension currently can have a total fund value of as much as £120,000 at the time of retirement, this is quite a change.

Those who reach state pension age on or after 6th April 2016 and where the petition for divorce was issued after the 6th April 2016 will not be able to share their old additional state pension but if they have a Protected Payment under the new Flat Rate State Pension, this will be shareable.

Also of particular note is that pension substitution will no longer be possible. Currently, couples who have been through long marriages where one spouse has remained at home and not in employment whilst the other has worked throughout can obtain the other working spouse’s full state pension credits upon divorce.

The only category of couples who can still try and benefit from pension substitution, despite the fact they will not reach state retirement age until after April 2016, will be those who are going to be divorced and obtain a Decree Absolute before this deadline.

Couples who will have passed State Pension age by 6 April 2016 will not be affected by the changes and will continue to receive state pensions in accordance with the current 3 tier scheme. They will also be able to substitute their basic state pension and share their additional state pension if they go through a divorce.

This means more money may be available for distribution between the parties even where a spouse is not at state retirement age by 6th April 2016.

However, for those who aren’t at state retirement age and have not issued a divorce petition by this date, they will lose out and there will be potentially less money for sharing.

The other change which happens this year relates to how much a person can hold within pensions. From 2016/17 the lifetime allowance will reduce from £1.25 million to £1 million which will hit high earners whose current allowances will reduce from £40,000 to £10,000 per annum.

For people with pensions, if the value of benefits paid out exceeds a person’s lifetime allowance then any excess benefits taken as a lump sum are taxed at 55%, excess benefits taken as a pension are taxed at 25%.

It may be in a person’s best interests if they are going through a divorce to reduce their pension position by sharing that pension with their spouse on divorce and thus reducing the tax liability.

Pensions are a complex but important issue when it comes to the assets involved in any divorce. As a result, divorcing couples should take expert professional advice on the subject.

For more information, please contact one of our specialist divorce lawyers.