Since April 2015, Chancellor George Osborne’s new pensions freedom regime has meant that everyone in Britain has much more flexibility over what they do with their pension after they turn 55.
You can still buy an annuity should you choose to do so, but you don’t have to. You also have the ability to take the whole lot as cash, or withdraw it steadily or in dribs and drabs (all subject to tax at your marginal rate).
At MoneyWeek, we like the pensions freedoms – we’re all for giving investors more independence and control over their money – and we’ve cheered the changes. But as with all rule changes, the regime shift has thrown up a few tricky questions, one of which is – what if you are divorced?
Divorce proceedings are often complicated by former spouses haggling over the division of assets. Of these, the biggest sticking points tend to be property and pensions, both major financial assets. You can’t chop a house down the middle. And it was previously impossible to withdraw an entire pension and split it into two. Of course, now it has become easier to do that (although tax liabilities mean it may not be practical to do so).
Indeed, the ability of 55-year-olds to access their pensions has apparently led to an upturn in the number of “silver splitters” – those in their mid-50s who are using their new financial freedom “to make a clean break”, says the Daily Express, by “divvying up the family assets without selling the family home”.
However, it has also led to fears that particularly embittered exes could exploit the new pensions freedom rules to renege on promises made during past divorce settlements. The problem lay largely, says the Financial Times, with “earmarking orders”, mainly written in the mid-1990s. These allowed divorcing partners to agree to pay a percentage of their pension income to their former spouse at a future date – typically splitting it between them. However, the new pensions freedom regime created the potential to take the lot out as a lump sum, rather than as an income from an annuity, thereby bypassing the less-than-watertight rulings.
As David King of consultancy Mercer tells the Financial Times, “Courts making these orders… could never have envisaged the recently introduced pension flexibilities, and so the wording of most orders does not sit entirely comfortably with the new options.”
The good news is that the government now plans to make it a duty for pension schemes to alert former spouses of any attempt by their ex to cash in a pension “which is subject to a divorce settlement”. That will give them the chance to take the case back to court if necessary. So far this only applies to defined-contribution schemes (the ones that most of us have), but the government is looking at whether it also needs to include final-salary schemes.