While rules prevent individuals from accessing DC pension funds until age 55, there may be no right of access until much later for individuals with a defined benefit scheme, points out Mr Favley.
He says: “But it might be possible to access benefits earlier than this by arranging for transfer to a personal arrangement but this may not be possible or sensible.”
Also, if a pension of one spouse is already in payment, he suggests options for the other spouse are likely to be more limited.
It is also important to ensure that any pension sharing arrangements do not trigger adverse tax issues for either party in the future.
Mr Favley explains: “For example, forcing an ex-spouse to take a large lump sum from their DB pension as part of a ‘clean break’ cash settlement could trigger the money purchase annual allowance rules, restricting that spouse’s ability to build up pension rights post-divorce.
“Or in the worst case, if a spouse with a large unprotected pension has to withdraw a significant lump sum, there could be a benefit crystallisation event triggering an immediate lifetime tax charge at up to 55 per cent.”
He adds: “Where one spouse has a large pension – near or above the £1.055m lifetime allowance – and the other has a small one, a pension sharing order could effectively equalise pension rights meaning that a lifetime allowance charge is unlikely to arise in future.”
Sharing options
In practice, the greater the pension assets, the more likely it is that they will be split as part of divorce proceedings, according to Nigel Cayless, associate director at Sackers.
So understanding the value of any pension benefits in the context of any other matrimonial assets and debts is another key initial step in deciding how to split pensions.
He explains: “In divorce/dissolution proceedings, pensions are valued using the ‘cash equivalent transfer value’ – that is, the amount the member would get if he or she transferred his or her pension to another arrangement.”
What follows then is one of the following pension sharing options:
- Pension sharing orders
- Pension attachment orders (or earmarking in Scotland)
- Pension offsetting
- Individual agreements
Pension sharing orders offer a clean break approach, according to Mr Cayless.
He explains: “The aim is that the capital value of the pension benefits is divided between the parties with the member’s benefits being reduced by a ‘pension debit’ and a ‘pension credit’ of the same amount being granted to the ex-spouse.
“This will be specified as a percentage of the value of the member’s pension rights rather than a fixed cash amount unless the order is made in Scotland [where earmarking is still an option].”
Pension earmarking, which used to be available throughout the UK but is now only available in Scotland, allows the courts to make an order requiring a part, or all benefits (except the state pension) to be paid to their ex-spouse or ex-civil partner once they become payable.
