Pension Freedom may have widened the choices available for how and when you can take your pension but with more individuals deciding to use this flexible access rather than purchase an annuity it brings a whole new range of problems now to divorcing couples.
How will they achieve their level of desired income where the pensions need to provide for two sets of outgoings rather than one? Is the asset split fair in terms of capital and income? What about the state pensions? Can we stop deliberate deprivation of pension assets?
These are just some of the questions that arise. When it comes to the “silver splitters”, those about to retire or already retired, and who need to be aware that simply agreeing an equitable asset split is not necessarily the right result for one or other party, if one ends up asset rich but income poor.
Legislation and case law determined over decades helps to decide how matrimonial assets should be dealt with. The Matrimonial Causes Act 1973, The Welfare Reform and Pensions Acts 1992 and 1999, The Family Law Scotland Act 1985 and the Pensions Act 1995 are just some of the legislation that can influence how pensions are treated on divorce and whether they are shared, offset or have attachment orders placed against them.
Whilst that does not change with Pension Freedom, the new rules will affect the advice given to ensure both parties are able to continue to live comfortably in their post-split lives.
The income issues will be important; the need will be not only to ensure that any split is fair in regards the total asset value but also to ensure that the future income is fair. As with an equal split of assets there may not be sufficient pension funds to provide the desired level of income over the long term.
It will be necessary to demonstrate how achievable the required level of income is and that if each party of the divorce has the same “share” of the assets, that it does not necessarily mean the income level is either achievable or sustainable over the longer term.
Here’s an example:
A retired couple:
Pre divorce they had a £305,000 mortgage free home and were living off his pension drawdown pot of £450,000 drawing £20,000 pa (£8,000 pa for house related costs, plus £12,000 pa for other living costs) they were intending to leave a legacy of £100,000.
Pre Divorce: the £450,000 pension fund to provide a £20,000 pa and a £100,000 legacy would require a 4.61% growth rate
Post-divorce they now need £39,000 pa for two houses, one retaining the matrimonial home and the other renting (UK average of £19,000 pa). If there are limited other assets, then an equitable split would be £377,500 each, but one now has a pension pot of £377,500 and the other £72,500 in pension and the home at £305,000.
Is this fair? Value wise yes, income wise no.
Mr Client Post-divorce: Pension fund value of £377,500 to provide £25,000 pa income for him (£19,000 housing costs, £6,000 living costs) the pension would need to achieve 7.3% pa growth.
The intended legacy is now out the window.
Mrs Client Post-divorce: Pension fund value of £72,500 to achieve an income of £14,000 pa (£8,000 housing plus £6,000 living costs), she would require 24%+ pa return, which is not feasible.
Showing a sustainable income from her share of the pension fund demonstrates the inequality of income.
Mrs Client Post Divorce: Pension fund value of £72,500 with a growth rate 6.2% would provide an Income £4,356 pa.
So equal but unequal and something that needs to be addressed as he will have a sustainable income of £25,000 pa whilst she will manage to achieve £4,356 pa!
Of course it will be possible to supplement the incomes with state pensions at the appropriate age. But what if one party, and it is usually the woman, does not have enough credits to achieve a full state pension. Gone are the days of one spouse being able to claim against a former partner’s credits on divorce.
An imbalance of £2,000 pa in state pensions may require finding £66,667 from the other marriage assets. In the past it was probably not taken into account when assessing assets but really needs to be now.
Adding to the complication you need to consider what happens when one party has a “protected amount” of state pension as calculated on 6th April 2016?
So a simple equitable asset split is not always the correct answer, it is important to consider the requirement for income when advising these clients.
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