Member Article

Further pension reforms and impact on divorced couples

Government plans to allow pension holders to sell their annuities for a lump sum from April 2017 have implications for anyone who is divorced, or who is planning to end their marriage.

Currently punitive tax rates of between 55% and 70% mean that there is very little incentive for pension holders to sell an annuity. However from next April the Government proposes that anyone who receives a lump sum in return for selling their annuity will only pay tax at their highest marginal income tax rate. For the vast majority of pensioners this will mean tax being paid at either 20% or 40%.

The plans, which follow pension freedoms introduced last year, will be particularly relevant to the growing numbers of over 50s who are divorcing.

Financial experts have already expressed concerns about pensioners cashing in entire nest eggs under last year’s new rules. If the Government goes ahead with its proposals, retirees already in receipt of their pensions will have even greater flexibility to raise lump sums

Without sound independent financial advice my concern is that divorced couples in particular could make wrong decisions with far-reaching consequences, and potentially disastrous results.

As a divorce lawyer, I am concerned how a family court would deal with a case where one party has a pressing need for capital, which cannot be met from existing assets such as property and savings. Might selling an annuity to raise capital be an option a court would consider as part of any financial settlement?

Where a divorcing couple is paying into several pension schemes, this might be a useful and flexible option. However, if there is only one pension, the court will need to tread carefully. At present family courts do not have the power to order one party to sell their annuity. In theory, in the future one spouse could be compelled to cash in their annuity in order to fund a capital order made by a court. In my view, in order to ensure a fair outcome, a court would need to consider the impact of any such order on the pension owning spouse - including the tax and other financial consequences.

Of course, the devil will be in the detail. Like many professional advisers I will be watching carefully for any further developments on these proposed pension changes. My advice, as always, is that anyone separating or divorcing should take sound financial advice, alongside expert legal advice, to ensure that they are making the rest decisions to help reach the best possible outcomes.

This was posted in Bdaily's Members' News section by Wayne Lynn .