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Divorce after A-Day

As a solicitor practising in family law, will the new pension simplification rules have an impact on any of my clients who are considering divorce?

There are two main issues to consider. The first relates to the theory as to how pension credits and debits will be dealt with in the future compared with today. The second is the far wider issue of the many significant changes which will take place concerning pension planning in the future, not least in the areas of contributions and investments.

On divorce, a pension debit is currently deducted from the total benefits allowable for an individual under company pension law. For personal pen- sions, the account is reduced and can be built up again subject to contribution limits in the future of a maximum of 40 per cent of earnings.

The former spouse awarded a a pension credit receives this extra pension over and above any previous limits.

Following the introduction of pension simplification from April 6, 2006, this will change and every person will have a maximum lifetime allowance commencing at 1.5m and rising to 1.8m in 2010.

For pension sharing after April 6, 2006, the member with a pension debit will be able to make good that loss up to the lifetime allowance. The former spouse receiving a pension credit will have to include the credit within their lifetime allowance. It is not included in their annual allowance.

This creates an about-turn as to who benefits. Under the current rules, the person giving away the pension tends to lose. Under the new rules, if the receiver of the pension credit already has significant pensions of their own, they could lose.

In general terms, it would be preferable for pension sharing orders to be issued before pension simplification takes place. This is because, with transitional arrangements, neither party will then need to take the shared amount into account for their future lifetime allowance test. This means both parties will be able to continue funding their pension irrespective of the debit or credit.

After April 6, 2006, where a client has substantial pension funds – and here we are talking about the receiver of any pension credit which, when added to their existing benefits, means their fund is in excess of or approaching 1.5m – it will probably be in their interest to consider less attractive attachment orders.

The whole area of contributions and investments also changes next April. Everyone will be able to make a contribution into their own pension scheme and receive tax relief up to an amount equal to their earnings in that year.

Companies will be able to make contributions and receive tax relief subject to normal trading conditions, up to 215,000 a member.

We therefore have the situation where, for the successful high-earning business owner, it might be better that they give away their pension as they will be able to make good their loss far easier under the new laws, with full tax relief being available on any contribution.

Where both parties belong to the same business, contributions from the company could be utilised to equalise pensions on an amicable basis, possibly reducing any need to bring pensions into the divorce equation.

The new investment rules will allow pension schemes to invest in a far wider range of areas. These will include residential property including members’ homes, holiday homes, works of art and so on. The pension scheme will be able to borrow up to half the total value of the fund.

This wider range of investments may make it increasingly difficult to obtain a gen– uine valuation of pension funds if they are invested in, for example, holiday homes in emerging countries. Equally, however, there is the option of utilising the pension fund to buy a residential property if no other funds are available.

None of these routes are necessarily the correct route and some have many tax disadvantages as well as advantages. What they do illustrate, however, is that far wider choice will become available with regards to the use of pension schemes by divorcing couples in the future.

In summary, the sharing of particularly big pension funds should be completed before April 6, 2006. After then, every- one will have a lifetime allowance, which will now include any pension credit received, with any pension debit being able to be made good.

The use of pension scheme contributions and funds may well form part of any solution in the future, as well as attachment orders for very big values.

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