Ease the pain of dividing the future
Pensions are among the most overlooked assets in any financial settlement on divorce. By Ruth Allen
ALTHOUGH the most recent figures from the Office of National Statistics show an overall drop in the number of divorces, the figure for over 50s has actually increased in the last ten years – exactly the population that is likely to have accrued wealth in various forms.
“In Scotland the Matrimonial Property – the assets built up during the course of the marriage minus any debts – falls to be divided between the parties,” says Kenneth MacPhie of Anderson MacPhie Financial Services.
“The starting point for any division is a 50/50 split, although there are circumstances that can justify an unequal division of matrimonial property. Very often the home is regarded as having the most value and certainly this is an important provision within any settlement.
“However, the respective pensions of the parties that have been built up during the course of a marriage can constitute as big a proportion of matrimonial property, and therefore require to be considered in any financial settlement on divorce. In short, pensions are often one of the most valuable and overlooked assets of the divorcing couple.
“Pension sharing is possible and regularly forms part of financial settlement on divorce. Pension sharing allows for some of the value of one party’s pension to be transferred to the other party on divorce. For final salary schemes and pensions in payment, a Cash Equivalent Transfer Value is obtained as the starting point, otherwise the fund value is used from money purchase schemes.
“Where the pension fund to be split is from an unfunded scheme like the NHS for example, the spouse receiving their share becomes what is known as a “shadow member” with the benefit becoming available at the scheme retirement age. Most other schemes will require the share to be transferred to an individual pension plan for the spouse. Where money purchase pension plans are the source, the same route would be followed.
“With personal pension plans, the need for financial advice is as great as ever to ensure that funds selected at outset meet the attitude to risk of the policyholder. Regular reviews would ensure that the investment remains on track and alterations made as required by switching or rebalancing.
“With the enhanced pension freedoms now available, the spouse who has received the funds can access them under the same rules from age 55. There is a pension commencement lump sum of 25 per cent paid tax free and subsequent income is added to other income received and taxed accordingly. It is recommended that a nomination form is completed to guide the pension trustees who should receive the fund since, on death before 75, a beneficiary can receive a tax free income from the plan. On death of the plan holder after 75, income and lump sums would be taxed at the relevant rate of the recipient of the fund. The definition of a beneficiary can now be anyone or a charity.
“Divorcing couples can come to an agreement in relation to the division of matrimonial property between them by way of negotiation. In such circumstances the parties will enter into a contract known as a ‘Minute of Agreement’ which regulates the financial settlement. If the parties fail to put such an agreement in place the Court can grant orders.
“A final reminder: the value of pensions can fall as well as rise, and you may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.”
Contact Kenneth MacPhie at Anderson MacPhie Financial Services on 0800 581474.
‘Parties will enter into a ‘Minute of Agreement’, which regulates the financial settlement’