Divorce: is it all trouble and strife?
There are more than four million divorced people in the UK and one in three marriages end in failure.
And, with credit crunch engendered financial stress bearing down on many marriages across the country, sadly these statistics are unlikely to improve.
My purpose is not to dwell on the personal fallout from the current crisis, but to highlight some important changes to the pension rules that will come into force in April.
Many divorce settlements will involve one or both parties having pension arrangements, which have to be considered in conjunction with all the other assets of the marriage.
But before looking at any changes, a reminder as to the choices open to those in this position is essential. There are three basic routes:
First, the couple can choose to balance pension rights against another asset. This is known as ‘offsetting’.
In such matters all of the couple’s assets are taken into account and the party holding the pension rights retains the pension, which is offset against the rest of the estate. The difficulty with this route is that the pension pot may well be substantially more valuable than the family home.
Remember that many people have used the family home to raise capital for buy-to-let investments and this will mean that there is little or no equity left to set against any pension pot.
The second route is what s known as ‘earmarking’. Under this arrangement the court instructs the first party’s pension scheme to pay a specific amount of the pension and/or lump sum when it comes into payment to the second party. There are some drawbacks with this option. First it does not give the couple a clean break. Second, if the order is for a regular amount, then this will stop when either the spouse with the pension pot dies or the receiving party remarries.
The last option is ‘pension sharing,’ when the pension pot is split at the time of the divorce.
This allows both parties a clean break by giving each of them a percentage of the pension pot as part of the overall divorce settlement.
So what are the changes? There are several different types of pension arrangement and the general rules surrounding these are many and various.
But the main change to these concerns the part of the pension that is built up by contracting out of the State Second Pension. These are known as protected rights.
Under the current rules a person can only take an income from the protected rights part of a scheme and it cannot be taken until age 60. Also, there is no lump sum. But, from April this year safeguarded rights (the new name for protected rights) will be abolished. This will affect any benefits coming into payment from 29th April 2009 even if the divorce took place many years ago.
The effect of this is that benefits will be able to be taken from age 50 onwards although, from 2010, this will change to age 55. Another change is the facility to take 25% as a lump sum.
A final thought concerns pension protection. If primary protection has been applied for and that person subsequently divorces, then that protection is lost.
Also, if secondary protection has been applied for and that person is subject to a pension sharing order, then that fund cannot be rebuilt as any post A-day (April 2006) contributions voids the protection.
For the person receiving the settlement, a pension credit does not count as a contribution but does use up part of their lifetime allowance.
This may restrict how much can be paid, as a pension contribution in the future may give rise to a lifetime allowance charge.
The bottom line in this is that, if you are involved in divorce proceedings, you will need to consider any pension pots very early on when discussing a settlement.
This will mean taking counsel from someone regulated and authorised to give such advice.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk