How do the April 2015 pension freedoms rules affect divorce?
Pension flexibility, introduced in April 2015, raises further issues around how pensions are considered on divorce and this affects all three options (offsetting, earmarking and pension splitting). Although pension legislation has been changed, other relevant parts of legislation (and practice) in relation to divorce have not. It’s too soon for any case law covering interaction between the new pension flexibility and divorce, but legal challenge could come. In the meantime there should be even more focus on making sure court orders reflect the intended result, in a way that can’t be frustrated through pensions flexibility. Additional issues include:
Currently pensions aren’t usually valued on a pound for pound basis with other assets, due to the lack of access to the full value. However, for those “silver divorcees” who are over 55, there’s now total access to defined contribution pension funds. This may lead to value parity with other assets. If so, the tax and future contribution issues surrounding flexible access need to be addressed in the settlement.
Pension flexibility may have a significant impact on the application of attachment/ earmarking orders - potentially leaving scope to circumvent the requirements set out in the order, unless the details in the order are very specific.
For example, the pension-owning spouse may be able to avoid the payment of the income as set out in the earmarking order. This could be done by choosing to take all benefits as an uncrystallised funds pension lump sum (UFPLS). If the earmarking order doesn't specify exactly when and how benefits must be taken, and / or doesn't specify "tax-free lump" or "PCLS", the order can be circumvented by taking the UFPLS (which doesn't pay a PCLS). Then, if there are no pension funds left to crystallise, there’s no income left to be covered by an income earmarking order.
Also (although not strictly an issue created by pensions flexibility) historically, the assumption was probably that pension income to be earmarked would be annuity income. Now though, the member could go into drawdown and take no drawdown income or a minimal amount of drawdown. In addition, legislation, since 2015, allows annuity income to reduce (meaning the original intention behind an earmarking order could be frustrated).
However, many pension providers will not give access to these options if they believe doing so could prevent them from fulfilling the requirements of the attachment/ earmarking order.
In April 2016, the FCA published PS16/12 stating “it is for the courts to vary any attachment order that may not work as intended should the member take advantage of the pension freedoms to access the pension benefits.” We expect a pension provider would ask that the Order is varied before they’d agree to put benefits in to payment.
Since April 2015, the non-pension owning spouse may prefer to have cash rather than a share of a pension fund and therefore although pension sharing might have previously taken place, it might not now. Where the member is over 55 this is possible, even if the spouse is much younger, as the right to access the pension fund is linked to the age of the pension policyholder.
The courts may decide that an UFPLS, or a series of UFPLS, should be paid instead of pension sharing. However, that could result in serious tax implications for the member and restrict tax relief on future contributions (because of the money purchase annual allowance).
All these conditions call for detailed financial advice and could lead to legal challenges, further expense, delay and frustration for many.