Tax on pension after divorce

kirky666

My partner had a separation agreement drawn up when she divorced in which she was entitled to half the net pension of her ex-husband up to the time of the separation. He took his pension last year and she started receiving monthly payments. This month she noticed that he paid less than usual into her bank account and when she contacted him he said it was because the pension was now paying higher rate tax (he's still working so this seems reasonable).

It seems unfair however that since the whole point of the agreement was to split the pension equally my partner is effectively paying higher rate tax on her share, even though her own income wouldn't warrant that. Apparently he had asked the company to pay the pension directly to the 2 of them, but they said this wasn't possible because the agreement is not an official pension sharing agreement.

Does anyone have any thoughts on this?

Thanks

dunstonh

There are different ways to "share" a pension. The different methods have pros and cons. It appears that the chosen option was not to have a clean break and this is a consequence of that.

Did the solicitor not discuss the pros and cons (or get an IFA to give her that advice)?

SallyG

"My partner had a separation agreement" -if this wasn't a court order but a voluntary arrangement not subject to court approval/"sealing" and assuming she hasn't remarried she can still apply to the court for a divorce financial order/aka ancillary relief which might include an order for pension sharing or pension attachment where her fair share of the marital pension income will go direct to her from the pension provider. She might equally be ordered to share other marital assets not previously shared under an informal separation agreement.

Zelazny

It does say in the first post that she gets half of the net pension amount. If this is what was agreed, then presumably it's what was judged fair when the agreement was made.

kirky666

SallyG wrote: »

"My partner had a separation agreement" -if this wasn't a court order but a voluntary arrangement not subject to court approval/"sealing" and assuming she hasn't remarried she can still apply to the court for a divorce financial order/aka ancillary relief which might include an order for pension sharing or pension attachment where her fair share of the marital pension income will go direct to her from the pension provider. She might equally be ordered to share other marital assets not previously shared under an informal separation agreement.

It is a voluntary agreement, but was registered in the Books of Council and Session (in Scotland) which gives it the same effect as a court decree. We don't think that the agreement is unfair; however as things stand the only winner is the taxman i.e. My partner getting less doesn't mean her ex gets more. We really wondered if there was any way to reclaim the tax given that the terms of the agreement were really to split the pension equally effectively as a separate income for each party.

kirky666

dunstonh wrote: »

There are different ways to "share" a pension. The different methods have pros and cons. It appears that the chosen option was not to have a clean break and this is a consequence of that.

Did the solicitor not discuss the pros and cons (or get an IFA to give her that advice)?

Yes both parties had separate advice; however I don't suppose anyone thought of the fact that both parties may pay tax at different rates once the pension was payable.

dunstonh

kirky666 wrote: »

Yes both parties had separate advice; however I don't suppose anyone thought of the fact that both parties may pay tax at different rates once the pension was payable.

Being taxed the same rate as the pension holder is one consequence of the option that doesnt result in a clean break. The adviser should consider this and make them aware of this as its a major issue when looking at the options.

sleepless_saver

kirky666 wrote: »

. This month she noticed that he paid less than usual into her bank account and when she contacted him he said it was because the pension was now paying higher rate tax (he's still working so this seems reasonable).

I'd want to know how has her ex calculated this as it's his total income on (part of) which he is liable for 40% tax, rather than just the pension. Because there's more than one source of income, it's unclear just what "net pension" means in these circumstances.

E.g. Has he assumed that the whole pension is subject to his highest rate which he might do if his personal allowance is set against his earned income, or has worked it out pro rata to his total income, or what?

ermine

whole pension is subject to his highest rate

That's what usually happens if you payer higher rate tax, you get shafted for 40% tax on all income. I've turned down business because I couldn't face working half for the government. Are you really saying that not only should the ex pay out some of his pension, but he should also limit his income too, or pay a marginal tax of 60% if he sponsors giving his ex's the pension @ 20% tax? Seems a bit rough to me...

sleepless_saver

ermine wrote: »

That's what usually happens if you payer higher rate tax, you get shafted for 40% tax on all income. I've turned down business because I couldn't face working half for the government.

Er no. You pay no tax on the first £7475, 20% on the next £35000 and 40% above that up to £150K.

System

However a pension is classed as a second income so if his primary income just takes him in to the 40% bracket then the pension is liable for 40% on the whole. Without knowing actual figures it is very hard to give accurate advice.

What I mean is that he is well within his rights to claim that the whole of the pension is attracting 40%