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Pension freedoms add ‘layer of complexity’ to divorce cases

Family lawyers are warning the Budget pension freedoms will complicate the way assets are split between divorcing couples.

Currently, courts assess non-pension capital, pension wealth and income when deciding how to share assets, but the Government’s reforms mean pensions can be taken as cash or used to buy an annuity or drawdown, or a combination of all three.

Stephens Scown partner Jo Stone says: “Those categories of wealth were quite distinct, but now there is a blurring between capital and pensions.

“The reforms open up the possibility of different permutations. When you know the only thing you can do with a pension is share it, you can achieve some certainty. Now they are blurred, it adds a layer of complexity. For instance, you could say we’ll share non-pension assets unequally because the member could dip into their fund if they want. It gives the court greater flexibility but makes it more difficult to predict what a judge is likely to do.”

Lawyers say the reforms could also impact ‘offsetting’, a common method of giving a non-member spouse a lump sum discounted because of the illiquidity of pensions in payment.

Blacks partner Paul Lancaster says: “I think there’s less of an argument for discounting – where people said their pension was all tied up in an annuity and so should be discounted as a trade off – as pensions become more flexible.”


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. I can’t see how things will really change. I lost part of my pensions in divorce and was simply based on the transfer values at the time and included any SERPS/S2P entitlement, as the DWP too, provide a lump sum value! As for a discount being allowed, well perhaps that should still be taken in account when being offset, as the proceeds of a pension fund after TFC, will be taxed.

  2. There are already earmarking orders in place that entitle an ex-spouse to a share of the pension when it is taken. Now, of course, it never needs to be taken.

  3. If someone is already drawing their pension income from a final salary scheme in retirement and gets divorced, is it not the case that, under the new legislation, if a CETV is offered to the spouse, they can then access some or all of their share of that fund when or if it is transferred across to them (as opposed to earmarked within the existing scheme)?

    If so, then what a can of worms that opens up!

  4. @Steve D….My understanding is that final salary schemes offer a transfer value under the present arrangements, even, I believe, public sector schemes. I can’t see what difference it is going to make, apart from the spouse (male or female) having a big spend up when they receive it!

  5. Could it be that solicitors and barristers are giving financial advice in areas they have no understanding of and in fact have no authorisation to do so.

    I believe there is a rising problem where solicitors are advising clients on pensions in the area of divorce and applying for the wrong type of orders or getting valuations incorrect. It will appear to me that many of the solicitors do not seek professional advice from authorised individuals and it should be remembered that solicitors can only give advice on pensions if they are registered on the exempt approved list, which many of them are not. I would hope that the FCA will start cracking down on this area as I believe there is widespread abuse and this does result in serious problems for clients.

    I am dealing with the case at the moment where a solicitor failed to ask whether a client had been made bankrupt before 2000 and applied for a pension sharing order when in fact they should have applied for a pension ear marking order. Now insolvency court is asking for funds to be transferred back to the ex-husband and for the correct order to be applied for, believe it or not two years later. This is a classic example of a solicitor not asking advice from a pension expert before applying for the correct order.

    You even have claims management firms advertising for this type of business.

    If the solicitor firm goes out of business due to high level of claims and the fact that their PI insurance probably won’t cover them – I suspect there will be a queue of claims at the FSCS which the solicitors haven’t paid into.

    Maybe that’s the real problem.

  6. Thanks Ray; not my area this, but it seems then, that the husband/spouse would thereby have to soldier on with his reduced income whilst their ex gets the rights of access to a lump sum (albeit taxable) as opposed to having to either purchase an annuity or enter drawdown with a capped level of income, as is presently the case!

    I bet the husband would have liked the same rights of access for some, or all, of his pension as his spouse will be enjoying under after April!

  7. @Steve D…That is a good point! I assume the spouse will be able to withdraw the pension as cash? I think I would rather stay in a final salary scheme myself, even if the spouse giving up the pension was allowed to unravel things.

  8. Keith, you make an excellent point about earmarking and a key point on the impact of the new rules. A key point that very, very few solicitors will have acknowledged.

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