Pensions and divorce: how the law is keeping pace with reality

Seen through a more philosophical lens, the law has a duty to attempt to keep pace with the shifting dynamics of the society it sets out to govern. Rather as dance partners hold each other, bend, sway and keep time and in step, so should the law reflect the needs of the citizens governed by it.

Possibly the most dramatic shift in financial legislation announced during the recent budget was the changes to pensions. In essence, it is now possible to draw down pension pots as lump sums, and as such, they have now become a source of accessible capital at the point of divorce, where previously their potential to be used as a bargaining chip was limited.

To find out what this might mean to you, let’s first look back at the pension picture just before the budget. In 2000 the law was changed to allow pensions to be shared at the point of divorce, with pension companies making payments of a percentage of a pension to a recipient spouse, under something called a Pension Sharing Order. Cardiff Law School undertook a study of such orders and found that they were generally used by older couples divorcing, and usually acted in favour of the wife. The study also found that the need to carry out a pension report, (with associated costs and timescales) prior to divorce proceedings finalising pension issues, meant that at times they were not undertaken, and that this in turn often led to the husband faring better than the wife.  In summary the researchers felt

‘The conclusion reached was that pension sharing was a good weapon in the court’s armoury but that it was used by only a privileged minority.  The more common approach was to offset pension against non-pension assets.’

But offsetting pensions had its own difficulties, precisely because they were not a readily measurable asset, in the same way that a house or a savings account may be. Indeed, a feature in The Telegraph in 2013 highlighted the possibility that many pensions were being seriously undervalued during divorce proceedings and that recipient spouses were, therefore, being short-changed. Under the April 2014 budget however, it is now easier to identify the lump sum value of a pension, and thus we are set to see offsetting pensions against other assets become a more prevalent practice. In taking this step the Chancellor is encouraging both the law and its practitioners to more accurately reflect the reality of the many ‘silver separators’ are living with.

The new rules are a little complicated, but in broad brush terms, the draw down options are as follows;

  • If you are over 55 and have a pension with a guaranteed income of more than £12,000 per annum you can now draw down the entire pot, with the first 25% tax free and the rest taxable at a marginal rate,
  • Or, if you are again over 55 and have a small pension pot no larger than £30,000 you can now draw the entire pot down with the same tax implications as above.

If you suspect that this significant change to the pension laws is likely to impact on the outcome of your divorce settlement, do make sure you discuss these issues with us at the earliest opportunity. Our experienced team can guide you through the options open to you.