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If you are going through a divorce the last thing on your mind may well be your – or your spouse’s – pension savings. However, as pension savings are a valuable personal asset they might be taken into account in your divorce settlement. Giving some thought to any pension savings you or your spouse hold in a SIPP at the start of your divorce proceedings could save you both stress and costs as matters progress.
When a divorce is being finalised, the SIPP provider is usually provided with a pension sharing order or annex confirming how pension savings should be allocated between you and your spouse. This blog focuses exclusively on pension sharing orders as they are much more common than pension attachment orders and earmarking. (For help with these, please contact your financial adviser our client manager.)
Typically this allocation is a percentage of the value of the assets held in the SIPP. If part of your SIPP is to be allocated to your spouse, you will be subject to what is known as a pension debit and, if part of your spouse’s SIPP is to be allocated to you, you will be subject to what is known as a pension credit. There are things to consider in each case.
- The SIPP provider will need to place a current value on the SIPP assets. If, for example, the SIPP assets include property then a surveyor will need to be appointed to confirm the current market value of the property, taking into account any leases in place in respect of the property and any planning permissions. Similarly, if the SIPP assets include unquoted shares, the current value will need to be confirmed by a suitably independent professional. You will need to budget for the cost of obtaining the valuations.
- Your overall SIPP valuation will be calculated by taking into account any contributions or transfers into the scheme from other registered pension schemes and any benefits paid to you.
- The amount to be allocated to your spouse; i.e. the pension debit will need to be calculated based on the information set out in the pension sharing order.
- How the pension debit will be paid to your spouse will need to be agreed. Your spouse will decide whether they would like to move the funds to another registered pension scheme or move them to a new SIPP with the existing SIPP provider.
- The SIPP will need to have sufficient liquid funds to settle the pension debit in cash or sufficient assets if an in specie transfer is to be made. The SIPP may have a significant payment to make and the trustees will need to consider the logistics of actually settling the pension debit. Will assets need to be sold? Can one of the SIPP assets be re-registered to your spouse’s pension scheme?
- Paying a pension debit could significantly reduce the value of the SIPP assets and the scope for future borrowing, which could have an impact on the SIPP investments.
- There is a strict timescale that will need to be followed to settle the pension debit. This is usually four months from when the pension sharing order has been issued and all of the relevant information has been provided, including where the pension debit is to be transferred to. Everyone will have to move swiftly if the deadline is to be met. It is important to discuss the practicalities of actually settling the pension sharing order with your solicitor and financial adviser early on in the divorce process. Selling SIPP assets can take some time but the four month deadline has to be met regardless.
- The pension sharing order will set out how any charges in respect of the settlement of the pension debit should be allocated between you and your spouse. Charges can be significant and will need to be budgeted for. Your SIPP provider should be able to give you an indication of the work involved and likely charges once they are aware of the plans for how the pension debit will be settled.
- Once the pension debit has been paid, your pension savings may be significantly reduced. You may therefore wish to start building up your pension savings with you or your employer making contributions to the SIPP. If you have a valuable form of protection against the lifetime allowance, you may lose this protection if contributions are made, whether personally or on your behalf. It is therefore vital to speak with your financial adviser before making any contributions and to establish what tax relief may be granted on the contributions.
- Your valuable protection against the lifetime allowance could be reduced or lost completely by the pension debit. It is worth speaking to your SIPP provider or financial adviser to confirm if this is the case.
- As your circumstances change you will probably want to update your ‘expression of wish’ form, confirming to whom you would prefer any benefits to be paid in the event of death.
- You will need to decide how the pension credit will be paid to you. Will you move the funds to a new SIPP with your spouse’s existing SIPP provider or transfer them to another registered pension scheme? You should speak with a suitably qualified financial adviser and your solicitor regarding your options before making any decisions.
- Not all SIPP schemes’ rules permit the setting up of a new SIPP to accept a pension credit so you need to check this. Barnett Waddingham’s scheme does permit this.
- If you choose to transfer the funds to another registered pension scheme the pension credit will be paid to the scheme in cash or as a transfer of an asset. You will need to agree what form the transfer will take with the transferring provider.
- There is a strict timescale that will need to be followed to settle the pension credit. This is usually four months from when the pension sharing order has been issued and all of the relevant information has been provided. Everyone will have to move swiftly if the deadline is to be met. It is important to discuss the practicalities of actually settling the pension sharing order with your solicitor and financial adviser early on in the divorce process, ensuring that you have provided all relevant information to enable the pension credit to be paid.
- The pension sharing order will set out how any charges in respect of the settlement of the pension debit should be allocated between you and your spouse. Charges can be significant and will need to be budgeted for. There may also be costs for setting up your new pension, which you will need to consider.
- Once the pension credit has been paid your pension savings may increase significantly. The pension credit may not affect your annual allowance – i.e. the amount you can contribute to your pension savings tax efficiently – but it will affect the amount of your unused lifetime allowance. It may be beneficial to speak to your financial adviser regarding this and also consider whether you would benefit from applying for protection against the lifetime allowance, if eligible.
- If you are an existing member of a pension scheme you will have pension savings in the form of contributions and transfers in. You may wish to consider whether to transfer these funds to another registered pension scheme or leave them in the existing arrangement. They may not form part of the pension credit and may therefore need to be considered separately. It is important to speak with a financial adviser before making any decisions as some rights may be lost if you transfer
- As your circumstances change you will probably want to update your expression of wish form confirming to whom you would prefer any benefits to be paid in the event of death.
- Certain pension credits may be deemed as “disqualifying pension credits”. This applies when the original owner of the funds has crystallised part or all of their pension prior to the pension sharing order being implemented. If you receive a disqualifying pension credit, there are specific things you should consider:
- A number of SIPP providers will not accept disqualifying pension credits due to the extra rules surrounding them (although Barnett Waddingham’s SIPPs do accept them). If you are going to receive a pension credit from a pension in payment, it is therefore really important to consider at the beginning of the process where the pension credit is going to be placed.
- Even though the credit came from a pension in payment, you won’t be able to draw an income from it until you have reached age 55 (unless provisions around ill-health/serious ill-health apply to you).
- There is no tax free cash entitlement on disqualifying pension credit as the pension commencement lump sum (PCLS) entitlement will already have been paid to your ex-spouse.
- As no PCLS is available, you cannot take an uncrystallised funds pension lump sum (UFPLS).
- If you choose flexi-access drawdown (FAD), income taken from a disqualifying pension credit will not trigger the Money Purchase Annual Allowance (MPAA).
- Depending on the size of the pension credit, you may be able to get an enhancement to your lifetime allowance (LTA).
The settlement of a pension sharing order can be a lengthy and complicated process and there is a lot to consider, especially at what can be a difficult time for you, personally. Thinking about what you are trying to achieve and the practicalities early in the process is key, along with taking advice from your solicitor, financial adviser and SIPP provider, who will guide you through the process and hopefully make things as easy as possible for you.