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Split decisions

Abbey for Intermed-iaries head of pensions and retire-ment Mike Brown says clients going through a divorce will need advice on pension issues in the run-up to A-Day and this is where IFAs should take the chance to link with solicitors.

There is a lot to do in the run-up to A-Day. IFAs need to review the pension circumstances of every client to ensure that, wherever possible, they have maximised their funds and fully protected their tax-free cash entitlements where these exceed the new limit of 25 per cent of the value of the fund.

Clients need to be in the right pension vehicle before A-Day to meet their future investment and flexible income needs. Attention needs to be given to clients with big funds, especially where they exceed the statutory lifetime allowance which is set at 1.5m for the tax year 2006/07.

These funds need to be protected against the lifetime allowance charge by adopting enhanced and/or primary protection. The good news is that these funds do not need to be registered until April 2009.

Clients who have funds below the SLA at A-Day but anticipate that their funds will exceed the SLA at the time of vesting can still protect their funds against the lifetime allowance charge by adopting enhanced protection.

For these clients, immediate action is needed, as they will, in almost every case, need to stop contributions before A-Day for their funds to escape the lifetime allowance charge on vesting.

With all this activity, it is easy to think that pension simplification only affects clients with big funds or an entitlement to tax-free cash of more than 25 per cent of the value of the fund. If IFAs fall into that trap, there is a danger of missing the opportunity to develop connections with solicitors who specialise in matrimonial matters.

Clients going through a divorce need advice on pension issues but in the run-up to A-Day, this advice is especially important where a divorce settlement involves pension sharing.

The key decision for any solicitor acting on behalf of a client in the run-up to A-Day where the settlement will involve pension sharing will be to decide if proceedings should be spee-ded up to reach agreement before A-Day or slowed down until after A-Day. This decision depends on which party they are advising.

Timing is everything and there is an opportunity to ensure that one of the divorcing parties can benefit from an individual lifetime allowance of more than 1.5m without adopting primary protection or resorting to the constraints of enhanced protection.

If the solicitor is advising the donor under a pension sharing order and benefits are to be taken after A-Day, the timing of the order is irrelevant as rights transferred away as part of a preor post-A-Day pension sharing order will be excluded from the valuation of an individual’s remaining pension rights.

The donor will be able to rebuild pension rights. Interestingly, under current rules, it is only in very limited circumstances that the donor can rebuild their pension rights.

Although rights transferred away as part of a pre-A-Day pension share will be excluded from the valuation of an individual’s remaining pension rights, they must still be taken into account, if appropriate, when calculating Revenue maximum occupational scheme benefits for the purpose of valuing preA-Day rights.

The real opportunity exists for the solicitor who is advising the recipient of a pension sharing order. They could be well advised to speed up proceedings simply because, where agreement is reached before A-Day, transitional protection will apply.

The amount transferred, together with an appropriate adjustment, if required, will effectively be added to the recipient’s lifetime allowance of 1.5m to calculate a new, higher lifetime allowance.

Recipients of a pension share will be able to register these rights using a special registration form within three years of A-Day. The Inland Revenue will issue a certificate showing the percentage increase to the SLA. Protection for pension credit rights must be applied for separately from any other rights.

Finally, where rights subject to primary protection are reduced in value as a result of a post-A-Day pension share, the Revenue must be informed and it will then adjust the amount of protection.


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