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Technical View

Pension Sharing on Divorce – some FAQs

On the horizon for 2018  

 

As mentioned in our Technical View published in January 2018, this edition looks at some FAQs on pension sharing on divorce or on the dissolution of a civil partnership, such as: 

  • Are there restrictions on how an ex-spouse/ex-civil partner can take benefits relating to his or her pension credit?
  • How are pension credit and pension debit rights treated against both the annual and lifetime allowances?
  • How is lifetime allowance protection affected when a pension sharing order is made?
  • What are the timescales for finalising pension sharing orders and when does the clock start ticking?
  • Can a pension sharing order be made when a couple divorce overseas?
So let's look at each of these questions in a bit more detail…


Q. Are there restrictions on how an ex-spouse/ex- civil partner can take benefits relating to his or her pension credit?

 
By and large “No”. The ex-spouse’s/ex-civil partner’s pension credit is itself an uncrystallised benefit, regardless of whether the original member has crystallised benefits or not.  As a result, the options available to the ex-spouse/ex-civil partner will very much depend on the type of scheme where the pension credit is held. Broadly, pension credit rights can provide the same range of benefits as other pension rights. That said, if the pension sharing order has been made on a member’s crystallised pension fund, whether this be in the form of an annuity, scheme pension or drawdown pension fund, then the pension credit will be known as a “disqualifying pension credit”. Put simply, this means that the ex-spouse/ex-civil partner will not have any right to a tax free cash sum. This also means that uncrystallised funds pension lump sum (UFPLS) cannot be offered as the client is not entitled to any tax-free portion. (The rationale behind this is that the individual with pension rights will already have taken tax free cash, or had the opportunity to take it from these pension funds and so it’s not possible to have a bite at the same cherry twice!)
 

Q. How are pension credit and pension debit rights treated against both the annual and lifetime allowances?

 
Firstly let’s look at the annual allowance. Essentially a pension credit on divorce/ dissolution of a civil partnership is a transfer. It is not classed as a contribution and so is not tested against the annual allowance.
 
Regarding the money purchase annual allowance (MPAA) ordinarily this is triggered when any individual first flexibly accesses their pension rights, for example by taking income from their flexi-access drawdown fund and this includes where the drawdown fund derives from pension credit rights. However, this isn’t triggered if an ex-spouse/ex-civil partner starts to take income from a flexi-access drawdown fund that is wholly derived from a disqualifying pension credit.

The person with the original pension rights, who is subject to the pension debit, can build back up his or her own pension rights. Any further pension savings that are made would be tested against their own available annual allowance, irrespective if he or she is subject to the standard annual allowance, MPAA or tapered annual allowance.

Moving on to the lifetime allowance (LTA) - the pension credit transfer itself is not tested against the LTA – this is only done when the ex-spouse/ex-civil partner with the pension credit rights chooses to take their pension. In other words no LTA test is done until the ex-spouse/ex-civil partner takes benefits. The value of the pension credit rights (all of them, including any disqualifying pension credit rights) are tested against the recipient’s LTA and not the person with the original pension rights before the pension share came into effect. It may be feasible for the ex-spouse/ex-civil partner to apply for an enhanced LTA. More information is available within the next section.

Regarding the original member with the pension debit, if this is paid from funds already in payment, then the original member's lifetime allowance will already have been used. The amount of LTA already used is NOT reduced. If paid from uncrystallised funds, then this is a transfer value and is not tested against the LTA (unless paid to a Qualifying Recognised Overseas Pension Scheme). 

Comment: Potentially getting divorced or dissolving a civil partnership may be a way to maximise lifetime allowance and/or annual allowance!
 

Q. How is lifetime allowance protection affected when a pension sharing order is made?


If the original pension scheme member holds lifetime allowance protection it depends on the type of lifetime allowance protection held. Primary, Individual 2014 and Individual 2016 must be recalculated after a pension debit is paid, and may be lost.  Enhanced and all Fixed Protections (2012, 2014 and 2016) are unaffected by a pension debit.   

 
The following table may shed some light on how a pension share is treated within the pension tax regime:
 
  Pension sharing order made before 6 April 2006 Pension sharing order made on or after 6 April 2006
Pension Debit Can be ignored when testing against the lifetime allowance.

Will be reflected in the value of the member’s accrued pension benefits as at 5 April 2006
Not tested against the annual allowance or lifetime allowance.
Client with primary protection, individual protection 2014 or individual protection 2016 – the value of protected benefits needs to be re-calculated if debit made.

Client with enhanced or fixed protection – the debit will not result in loss of protection.
Pension Credit Up until 5 April 2009 it was possible to apply to HMRC for an increase in lifetime allowance unless primary protection is held. Not tested against the annual allowance.

Should be tested against the lifetime allowance. Enhancement to the lifetime allowance is available if credit is from a pension in payment.
 
Note: Lifetime allowance protection applies to individuals and cannot be transferred.
 

Q. What are the timescales for finalising pension sharing orders and when does the clock start ticking?


Pension sharing orders must be implemented within 4 months of the transfer day* or, if later, when all the information needed to implement the order is received.  Normally, the ex-spouse or ex-civil partner must be offered:
  • a transfer to another pension scheme;  or
  • membership in the same scheme as the scheme member.

*In practical terms the “transfer day” is normally the later of:
  • The date of the decree absolute,
  • 28 days from the date shown on the pension sharing annexe

 
In line with the pensions on divorce regulations the pension scheme administrator/trustees must ensure that by the end of the implementation period the ex-spouse/ex-civil partner has transferred their pension credit to another suitable pension scheme/plan.  Both the scheme member and the ex-spouse/ex-civil partner need to be kept informed throughout the process.

Q. Can a pension sharing order be made when a couple divorce overseas?

 

Foreign courts have no jurisdiction to make a pension sharing order on a UK pension arrangement. If a couple get divorced overseas and they wish to share the benefits held under a UK pension, they need to obtain a pension sharing order from a UK court.

A print friendly PDF is available.

As you can see these FAQs highlight how important financial advisers can be in this situation. More often than not, divorcing clients will need financial advice as to how pension rights are taken into account within a financial settlement on divorce to ensure that they can make an informed decision on which of the options is the most appropriate to suit their own circumstances.
 
Next time we will compare and contrast pension sharing and earmarking.

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