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Martin Jones: Getting the most from pension sharing rules

The modern approach to pension sharing needs revisiting, given that the legislation is nearly 20 years old.

The pensions world continues to evolve at a healthy rate of knots and advisers are used to staying on top of all the new products, features and functionality. However, the legislation that governs aspects of it does not. A good example of this is pension sharing on divorce.

Pension sharing is the legal mechanism by which some of a member’s pension funds are transferred into a separate pension scheme in the name of their former spouse. It works by taking the percentage in the court order and applying it to the cash equivalent transfer value of the member’s pension scheme at a given date.

By and large it works, but there are times when it can be a challenge to square it off with modern pensions. The reason for this is that the governing legislation, the Welfare Reform & Pensions Act 1999, is almost 20 years old.

A lot has happened with pensions in that time, not least with the rise of self-invested pensions in the form of Sipps and SSASs, and today’s pension schemes are a great deal more sophisticated than those from when the rules first came into force.

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All of this was highlighted by a recent Scottish Sheriff Court case of G v G [2017] SC ABE 37. The key aspect of the case was the validity of a further court order against the ex-husband in addition to a pension sharing order.

The background, however, was that the administrator of the pension scheme (a Sipp in this case) could not implement the order. The problem was an illiquid investment, and was not a scenario likely to have been envisaged in 1999.

However, it’s something that could be relevant in thousands of cases today. With that in mind, here are a few technical aspects worth bearing in mind when advising on pension sharing cases.

Signing divorce formCommercial property

Commercial property is now a mainstream investment in Sipps and SSASs. However, from an investment perspective, a property is largely illiquid.

If your client has a scheme that is, say, 80 per cent invested in a property, you will need to think about how the scheme will raise sufficient cash to pay for the pension credit. This could include the scheme taking out borrowing or the client making further contributions.

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If neither of those is feasible, you may need to question whether pension sharing is appropriate. Alternatively, the ex-spouse may want to take on partial ownership of the property through their own scheme. However, this too could be problematic.
First, the ex-spouse’s pension provider might not permit joint property ownership with another provider. Secondly, it’s difficult to shoehorn this into a pension sharing order, given you can only specify a percentage of the cash equivalent transfer value (CETV) – there is no apparent scope in legislation to specify a share of a particular asset.

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Transfers in-specie

Once the value of the ex-spouse’s pension credit has been calculated, this value is set in stone. The pension scheme administrator has to make a transfer of that value. If the administrator makes that transfer in cash, they can be confident they are transferring the exact value of the pension credit.

If they make that transfer in-specie, and the investment mix means the valuations are fluctuating on a daily basis, however, it’s harder for the administrator to demonstrate they have transferred out the value as determined in accordance with the court order.

Transfers in-specie are two a penny these days. Rather than leave themselves open to challenge from either party or from HMRC, however, the administrator may insist on settling the pension credit in cash.

Avoid complexity

When set against the context of modern pensions, a pension sharing order is a very blunt instrument. This means it can only be used to give effect to the most basic of settlements.

If the parties are trying to engineer a more sophisticated solution, it’s possible that it might not achieve their desired outcome; the pension scheme administrator may not be able to implement it or, worst-case scenario, it leads to unauthorised payment tax charges.

The bottom line is that pension sharing orders can still achieve great outcomes, but remember – while you may have moved with the times, the rules haven’t.

Martin Jones is technical resources consultant at AJ Bell

 

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