Splitting a pension on divorce and tax free lumps sums

JamboBwana

Hi. I'm a newbie on here. Think my issue can be easily answered but I'm really in the dark on this. I'm going through pretty awful marriage split and issue of pension has come up. It's in my name and I'm 56. I haven't touched it so far. Ex-partner is 51. I'm needing to pass over 50% of my pension to ex - no problems so far. But ex wants a cash sum now - not pension. I have no cash and only source/assets I have is pension. So ex's lawyer says I should cash in my pension (it is actually in four pots/policies) and pay over a lump sum to my ex.

Aside the issues of fairness I need to understand:

• If I 'cash-in' - is it right that I will only get 25% of the total(s) as a lump sum?
• Is it right I won't be able to touch the rest - 75%?
• Could I 'cash in', take the 25%, hand it over, and then transfer/give the rest to my ex in some way - for my ex to put into a new pension?
• What could my ex do with the remaining 75%?
• Could I then start a new pension for myself?

Any help would be great. Can't find an answer to this one.

Mojisola

JamboBwana wrote: »

I'm needing to pass over 50% of my pension to ex - no problems so far. But ex wants a cash sum now - not pension.

If you haven't got cash, your ex can't have it now.

Read this thread - https://forums.moneysavingexpert.com/discussion/3447527

jamesd

First thing is, the standard thing is 50% split of gains during the marriage. That would mean up to 50% of each pension going to your ex, if all are defined contribution/personal pensions. Your ex would get that but then at age 51 is too young to take a lump sum from personal pensions. So that's part of why it's being requested that you take lump sums: you're allowed to because you're at least 55 years old. You'd also be entitled to up to 50% of hers.

We really need to know more about the pensions because the considerations for defined benefit/final salary pensions are very different from defined contribution/personal pensions.

For the DC and personal pensions it is not particularly harmful to take the lump sums provided what you are getting in exchange makes it worthwhile. Unless you chose to be nice she'd get half of the uncrystalised (no benefits taken, neither lump sum nor income) amount and could choose what to do with it when she reaches age 55. As can you. It is not completely loss-free for you to do this. Within limits you can take a lump sum and recycle that into new pension contributions and get a second chunk of tax relief. So you lose that opportunity for more tax relief on the money. The lost opportunity is worth about 5% of the lump sum for a basic rate tax payer who is not able to use a salary sacrifice pension scheme for the recycling. For higher rate or those using salary sacrifice it's worth more.

For DC pensions you can take an income from the 75% in two main ways, by buying an annuity or by using income drawdown, which means leaving the money invested and taking an income from the investments. You're both way too young for buying an annuity to be a good deal. With income drawdown you can take the income and recycle all of it into new pension contributions if you like, getting a second bite of tax relief. Or you can just take the income and perhaps invest it within a S&S ISA. You don't need to be retired to do this, doing it while working is fine. In addition, as soon as it's crystalised (lump sum or income taken) the death benefits change, from 100% of the pot going to anyone, to 100% going to a spouse inside a pension pot or 45%, after 55% tax charge, going to anyone outside a pension. Since you won't have a spouse that has significant potential implications for whoever would get your estate if you died before you really needed the income. A life assurance policy can be used to cover this risk, to make up the 55%. Children would be the big losers without that insurance - they'd get only 45%, not 100%. Also, the income is taxed, the lump sum isn't. So the income has its value reduced by your income tax rate.

For DB pensions it is likely to be very harmful to take anything from them at age 56 because that is before normal retirement age of most such schemes. Further, the commutation rate is usually poor. It takes something like 28 times as much lump sum as income given up to be actuarially neutral but schemes typically offer between 12 and 22 times. What this means is that taking any lump sums from such schemes is likely to make a person in normal good health significantly worse off over their remaining lifetime. For this type, she wouldn't normally get any lump sum but would instead get a right to future income when she reaches the normal retirement age of the scheme. Or, in some cases, when you do, it depends on the specifics.

So, if it's DC money, it is not fair to you to trade 1£ of pension pot for £1 of lump sum outside the pension pot. Allowance for the lost opportunity to recycle and the cost of insurance for the death benefit change and your reduced flexibility because you lose the lump sum availability and are stuck with only income needs to be made.

For DB money it's even worse and you and she would face major losses from doing it. An actuary should be involved to calculate the value of the loss and what a fair exchange rate would be. She'd probably have to give up twice as much total value in exchange as the lump sum she'd get to make this actuarially neutral. Maybe more, it's that bad.

So, best to forget it for DB but for DC it's potentially doable if they are going to make a fair exchange rather than trying to scam you into 1:1 exchange. In any case, it's likely to be worth asking an IFA to assist in working out what fair exchange rates are, involving an actuary as needed for any DB pots.

For a DC pot a fair deal if you are a basic rate tax payer might be her giving up £150 of other money to get £100 of lump sum from you. Not perfect but that's the sort of value it'd take to be fair. £100 to £125 is just to over basic rate tax. The going up to £150 is to allow for the cost of insurance and the loss of flexibility.

Both you and your ex can start new pensions. An unlimited number of different personal pensions or work pensions.

Yes, a court can order the remainder of a pension pot after a lump sum is taken to be transferred to a spouse. Doesn't have to be all of it.

As soon as you tell her about these sorts of things she's likely to be a lot less keen on getting a lump sum from you, having realised that you recognise how bad a deal a 1:1 exchange is for you and that you will want a fair exchange rate.

xylophone

So ex's lawyer says I should cash in my pension (it is actually in four pots/policies) and pay over a lump sum to my ex.

And your own solicitor says in response.........?

atush

I agree, get your own solicitor to reply.

As far as I can see, they cannot make you commence your pensions for a lump sum, and if you don't have the cash, she can't have the cash and must get some pension transferred to her and she can take the LS in 4 years.

If they give you a good enough deal, then think about it. But as James said, 1:1 isn't fair.