Asking for a friend .... actually, not, asking because I’d never thought folk w/could do this ...

Thriftydude

Married friend has a large pension pot (£2m - 2.5m) having left a final salary scheme when gilts were absurdly priced (lucky timing).

They have FP of around £1.3m so reckon they’re in for a hefty tax bill due to the LTA cap at the point of crystallization, and as all of their pension savings is in this pot (‘spouse has nowt).

They’ve heard that a colleague (similar circumstances, such as pension) didn’t face that problem as they were divorcing so had a pension sharing agreement and split the pot, thus avoiding almost all of it (albeit each half got ~50%). Illness, care & kids caused that colleague and now former spouse to continue to live with each other for a while (in fact, they still do) until they sort other things (or health :sad: ) out, but it made my friend think about the concept of a “tactical divorce” to save the LTA cap tax .... but .... they hadn’t even considered the impact of separate tax free lump sums or income tax treatment so there’s lots more to play for I’m guessing (?)

Here come the questions ....

Friend is now talking about whether such a “divorce” is tax evasion or tax avoidance (?), and whether it would prove to be of benefit in their circumstances (empty nesters is about as much as I could describe).

This isn’t your usual MSE conundrum, and morally I’m sure the numbers involved may polarize many here with more modest / normal pots, but I’m working on the principle that paying as little tax as is legally due holds good for everyone in the UK (i don’t imagine many of us call up and agree to pay more than we need to). But it got me thinking of what others, without such an embarrassment of riches, might think - morally, legally and financially ?

I don’t imagine there’ll be much sympathy around for this one (?), despite the fact that they amassed this pension through saving and investments of a 40+ year working life - i.e. its not inherited wealth. It’s maybe also one that “tomorrow’s” government may face when it comes to the current GP / doctor crisis as the short term stuff that’s out there in terms of AA relief is (IMHO) a short term bandaid and the issues of LTA will soon enough become a focus for many in the senior ranks of the public service.

Thanks for any and all views expressed .... TD

ex-pat_scot

Evasion.
As i understand it, you have to declare in divorce proceedings that you have irreconcilable differences and that the marriage is irretrievable (or something similar). To knowingly mislead is perjury. To do so for tax purposes is fraud.

I do sympathise with the conundrum, and the wider point about being taxed as a unit when it's convenient, and as an individual when convenient.
Eg one spouse working and the other not: sorry you can't use your PA (OK there's a little amount you can transfer, but the "one spouse working" model is hugely disadvantageous).
The child benefit clawback is another area of huge disadvantage.

it would be very helpful to just get rid of the LTA entirely. The current doggerel mess is a complete shambles conceptually and practically.
The NHS is driving this as an issue but it's a real mess for lots of people.

Albermarle

Married friend has a large pension pot (£2m - 2.5m) having left a final salary scheme when gilts were absurdly priced (lucky timing).

One of the issues about taking the CETV for a DB pension is that it can considerably worsen your position in respect of the LTA eg a £2M CETV was probably in exchange for an annual pension of say £65K , which would have contributed only £1.3 Million to LTA .
So your friend has largely brought the situation on himself and now is trying to evade his tax liability through deliberate fraud .

but I’m working on the principle that paying as little tax as is legally due holds good for everyone in the UK

The key word is legally and even if you could say it is a grey area , most UK citizens would feel uncomfortable, with anything on this scale that was not 100% clearly legal.

Notepad_Phil

In my eyes this would be tax avoidance - and I'm fairly sure the hmrc would consider it as that too if they ever got wind of it.

As per https://www.gov.uk/guidance/tax-avoidance-an-introduction

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

Lying on court documentation that the marriage has "broken down irretrievably" would also open them to perjury charges if/when found out.

There's also the possibility that the wife who suddenly gets a million quid + a split of all the other matrimonial assets decides that she's not so sure that she wants to get back together again

gm0

I am sure tactical divorces have already quietly happened for some people with severe tax optimisation concerns (either from a multi-million scale of problem of retrospectively being hit for 25% of a lot) - or aggressive attitude to tax minimisation.

Fundamentally there is nothing impossible or illegal about splitting up and a subsequent reconciliation. It is a thing that happens because people - the grass is greener - and then it isn't. The tax man has to accept the IHT swings and Pension Tax roundabouts of genuine divorce where Pension debits "move" half the pension to the ex-spouse. If a few people marry again then they now both get to use their LTA. A sideshow edge case that won't get fixed. The whole personal LTA concept is broken anyway for couples retiring with asymmetric saving from parenting and the level has been cut too far. Poison and such small portions.

As others have said a non-genuine divorce could be viewed as evasion or fraud - but how could you tell or prove that in practice. Easier no fault divorce being "on the way" as we speak. What we actually need instead of all this nonsense - LTA, MPAA, AA, Protections and gaming thereof- is a stable incentive for pension savings (say a flat rate income relief for all @ 30% +/- 5 and fewer constraints on the timing (self employment) or amounts of saving. "Stability" requires political consensus not to screw around with it constantly. Which will not be forthcoming in these politically polarised times.

Pensions rules are full of edge cases and unintended consequences as with cutting the LTA to the point that 3%/1m LTA = 30k - still a very good but hardly oligarch pension being the "upper" limit before the penalty ramp begins. Still at society level this is a problem for practically nobody - the ONS data on how much people actually have in DC funds makes for grim reading.

I personally wouldn't do it (I have no need to anyway) but I wouldn't particularly criticise someone who did. If the treasury gets to weasel around incompetently creating retrospective tax traps, then you get to work up to the limit of the law at the time you transact. If they didn't think it all through properly. Too bad. That is their incentive right there to think it through better.

Now for the larger group in the wealth tier down who are "at LTA risk" from growth for the age 75 BCE test - during the 20 years 55-75 from investment growth, currency depreciation, inflation > CPI etc. This is something I have been looking into as a family with an asymmetric DC pot situation.

There is a simpler solution than divorce. Crystallise (in stages or at the outset understanding rules on pots, dependents, IHT). Draw enough every year to fill your lower tax bands paying your taxes and aim to keep the cash number around or below the 25% penalty level at 75.
Perhaps even dial your risk down a bit if you are generating more than enough income (or have the high risk assets in the ISA and the lower risk ones in the SIPP so you take the gains where the penalty is not applied.. All these are legal, ethical and rational choices to the incentives offered to simply not pay the 25% extra such as by taking more risk than needed in the pension rather than elsewhere or failing to draw the income regularly against annual tax allowances and basic rate band.

Or you can ignore the whole thing and hope it goes away and is replaced by different nonsense before you get there. But as some say - hope is not a strategy.

Paul_Herring

Thriftydude wrote: »

i don’t imagine many of us call up and agree to pay more than we need to

https://www.ft.com/content/4b3e6db0-e57a-11e7-8b99-0191e45377ec

Just 200 voluntary payments of extra tax received in UK since 2000 [to 2017]

ex-pat_scot wrote: »

it would be very helpful to just get rid of the LTA entirely. The current doggerel mess is a complete shambles conceptually and practically.
The NHS is driving this as an issue

The thing that's been making the news recently regarding doctors is the £40,000 yearly limit being tapered for those earning more than £110K/£150K and the resultant tax bill for having gone over that limit, not the LTA (though I don't disagree that either the yearly limit, or the LTA, and possibly both, need to go, or at least increased.)

DairyQueen

This isn't the first time divorce has been suggested as a solution to the LTA problem on this forum.

Is it possible? Of course.

Is it fraud? Yes

Is it immoral? IMO - Yes.

Some things are more important than money. Divorce, even if intended only as tax-avoidance, has psychological and emotional impacts. The law of unintended consequences applies.

I would view this idea through the same prism as an open marriage. In practice the outcomes may be very different from those theorised.

kangoora

I semi-seriously considered this. As my wife is 7 years younger than me with a much smaller pot and no DB pensions we are facing 15 years (roughly) of me paying tax and her being significantly under her personal tax allowance if she withdraws at a sustainable rate.

We settled on her contributing about 60% of her salary to her current DC pension to address the imbalance as she is working a couple more years.

It will still be imbalanced with me paying tax and her still being a few £k below personal allowance but it will be better than it would have been. If we'd known 20 years ago what we know now the situation would be much better.

swanny65

Slightly off on a tangent but similar.

Over 30 years ago when i was a pensions officer at the then DHSS i handled a Retirement Pension claim from a woman who had divorced her husband at 59 1/2 years of age, claimed a full pension on his NI record (she had a small graduated pension no cat A entitlement) and then remarried him at 60 and a few months. Pretty sure they were around the same age. She kept the full Retirement Pension.....

Perfectly sensible and legal. My guess is it made them several thousand pound before up to the time he retired and subsequently.

Malthusian

swanny65 wrote: »

Over 30 years ago when i was a pensions officer at the then DHSS i handled a Retirement Pension claim from a woman who had divorced her husband at 59 1/2 years of age, claimed a full pension on his NI record (she had a small graduated pension no cat A entitlement) and then remarried him at 60 and a few months. Pretty sure they were around the same age. She kept the full Retirement Pension.....

Perfectly sensible and legal.

Nope. As above, it's illegal under the divorce laws as they stood then, as they transparently committed perjury to get the divorce through the courts. The fact that you couldn't be bothered to escalate it and your superiors couldn't be bothered to prosecute it is neither here nor there. People get away with fraud all the time, it doesn't stop it being fraud.

Getting away with perjury is not the fundamental problem of a tactical divorce. The fundamental problem is that you risk losing 50% of your entire pension fund, and 50% of all other assets, for the sake of a 25% tax bill on the excess only over the LTA. Because your ex, now a considerably more eligible prospect than when they married you originally, might decide not to go through with the reconciliation, and instead use their new independently wealthy status to get themselves an upgrade.

To make the fraud ironclad against an anti-avoidance challenge, you have to remain apart at least a few years to make the reconciliation indistinguishable from genuine. (And going to these lengths is necessary if you're trying to avoid a tax bill of hundreds of thousands, in contrast to the nickel-and-dime benefit fraud that Swanny waved through.)

This significantly increases the probability that your newly eligible ex will not want to go through with the planned reconciliation. Assuming of course you're not in love with each other. Which you're not, because if you love each other then you wouldn't consider remaining apart for several years to reduce your tax bill.

If you're considering a half-baked scheme like this and you think your ex won't be tempted to use their seven-figure independently wealthy status to find an upgrade, you're dramatically overestimating your own value on the marriage market.

TBC15

Just a thought, would buying a place in Portugal and taking your pension there get around the tax thing?