Loosening lockdown: practical points for separating couples
As highlighted by my colleagues in previous blogs in this series, the uncertain financial trajectory is something that couples going through the divorce process need to consider carefully as it can have an impact on their financial settlements.
Pension assets can often get overlooked on divorce generally as they are not viewed in the same way as a cash asset or a property. They can, however, be very valuable and should always be considered as part of the asset pot as a whole. The sharing of a pension is generally dealt with in two ways:
As both these options are reliant on accurate valuations being available and considered in light of the assets as a whole, it is generally advisable to seek financial advice before deciding which option is best for you. Pension experts can therefore provide invaluable assistance alongside your legal advisor on divorce. This is particularly the case in a volatile market as pensions are just as susceptible to fluctuations as a result of changes in the financial markets, possibly even more so than some other assets.
I asked Richard Hopkins, an Independent Financial Advisor and expert in pensions on divorce at Blackstone Moregate, to share some points to note in respect of pension assets and the impact of the pandemic so far:
As we look to adjust to the “new normal”, thoughts may now turn to the implications on personal finances on the back of all the current market turmoil and uncertainty. With interest rates and gilt yields at record lows, it is more important than ever to consider the impact that all this could have on the outcome of any financial settlement and in particular for the purpose of this blog, pensions."
Whilst it will be obvious that the value of most invested defined contribution (DC) pensions will be lower, the reverse may be true of defined benefit pensions (DB). If a transfer value was produced prior to the crisis, it may be worth obtaining a new one as the values could have moved significantly, partly due to the fall in gilt yields. This could have implications for any pension sharing order and in turn could affect the results of any actuarial reports. A word of caution, though, as some DB administrators are “pausing” transfers or putting them on hold in response to the impact of COVID-19, thus adding delay and may cause problems in getting information."
Another consideration is to look at whether to de-risk a DC pension portfolio given the high volatility in the markets ahead of any potential pension sharing order. This may help to stabilise finances at a difficult time, giving time to re-group and agree the way forward. I would also highlight self-invested personal pensions that hold commercial property or unquoted stocks as the values may well have deteriorated if tenants are unable to pay rent or who go out of business, as could be the case for the unquoted holdings."
Yes, If you are in a position where you have lifetime allowance issues (i.e. total pension funds over £1,073,100 (or higher if protected)), it may be worth re-looking at values to see whether the market falls have materially impacted to ease the problem. Even if not, then it’s worth considering how pension sharing on the excess over the lifetime allowance could help with your tax planning, given that the excess tax is 55% in the aggregate."
In some cases, this can open up an opportunity to even add to pensions again after the pension sharing order has been implemented, especially as the income threshold for maximising your annual pension allowance of £40,000 has now risen to a base of £240,000 before taper applies. This can be a complicated area of legislation, though, so do take appropriate specialist investment advice."
In these times, financial planning is even more key and so it’s important to re-look at how this crisis has affected your pensions and finances and therefore plan for the long term implications post-divorce.”
As Richard emphasises, the important thing for anyone going through the divorce process at this volatile time is to take advice. Whilst it might seem costly and futile to instruct a pension expert at a time when valuations are fluctuating, they will still be able to assist you, even if it is just to flag what does and doesn’t need to be updated and to help you to obtain the relevant information from pension administrators. If you have already instructed an expert, it would be sensible in most cases to ask them to update their report before you and your spouse reach an agreement as their conclusions may have changed.
In circumstances where you have already reached an agreement or obtained a court order, it is still open to you to at least review the position as it is possible that the fluctuations in values may be drastic enough to warrant you seeking to reconsider the terms. However, please do bear in mind that a mere change in asset value does not necessarily allow you to revisit an agreement or court order. My colleagues have blogged about ‘Barder’ events, which are very useful reads:
Broadly speaking, where pension assets of the same class (i.e. all DB, or all DC) have been split equally on a 50:50 basis, you will be both be sharing in any losses so you may decide that instructing an expert to review is not necessary. However, where you have decided to offset or the pension assets that you have shared are in different classes, you may wish to consider obtaining an updated report to see if any tweaks are required. The overriding advice is to consider your options and speak to a financial advisor where necessary.
If you are concerned about the value of your pension (or that of your spouse’s) and you wish to understand how the current financial environment may affect your financial settlement on divorce, please contact a member of our team.
You may also be interested in reading our other blogs in this series about changes in financial circumstances as a result of the coronavirus crisis and its impact on divorce settlements and maintenance:
Please note that the general guidance provided within this blog is accurate at the time of writing (27 May 2020). It does not constitute legal advice and specialist advice should be sought in individual circumstances.
Sarah Dodds is an Associate in the family and divorce team, where she specialises in complex divorce and financial work as well as private children cases. Sarah specialises in divorce and matrimonial finance disputes, including in particular those which contain complex pension issues. She also regularly deals with high conflict cases relating to children’s arrangements and financial provision for children, including international and domestic relocations and child abduction.
Richard Hopkins is an Independent Financial Advisor (IFA) and a founding director of Blackstone Moregate with considerable experience in financial services. Apart from holding the highly sought after chartered status, he is also a qualified member of STEP (the Society of Trust and Estate Practitioners) and a long standing member of Resolution (specialists in pensions and divorce).
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