Pension Offsetting on Divorce

Dannybhoy

Hi Everyone,

Just looking for a little guidance that may help my ex spouse and myself.

It's a case of pensions offsetting on divorce under Scottish Law. We are on very good terms and have settled everything amicably and also agreed whatever the monetary outcomes are we will continue in this trend. Upon separation we divided all assets we held other than pension pots. This included savings, vehicles we owned, and I paid out to my ex spouse 50^% of an agreed value of our joint property in Spain which is now entirely in my name. I live permanently in Spain whilst my ex now lives permanently in Scotland.

We have appointed a Scottish solicitor to aid us with our pension offsetting based on the Cash Equivalent Transfer Value dates of our individual pensions from date of marriage until date of separation, as per Scottish Law. These have now been received and confirmed as a payment due in favour of myself to the value of £193,000. No monies will change hands or transactions will take place until after the new tax year begins 06/04/2021.

I reside in Spain full time and whilst I do not have Spanish Residencia my application has been received and approved and should come to fruition fairly soon. I am 58 years old and have no UK or Spanish income and therefore pay no UK income tax. I live off of savings accrued over my working life in the UK.

My ex spouse is 56 years old, lives in Scotland, and is unable to work due to illness and therefore has no other form of income other than savings at the moment, no UK benefits or anything.

We are looking at various scenarios on how to settle the £193,000 transferring to me. My ex has a money purchase/defined contribution pension which currently sits at £139,000 transfer value. Utilising this we think she can raise approximately £118,000 in cash (£139,000 – 25% tax free cash = £34,500. Remaining £104,500 - 20% income tax of -£20,900 leaves £83,600. £34,500 + £83,600 = £118,110.

The total amount of £193,000 would then be made up of from her own savings with an additional £74,890.

• Can I ask any qualified individual if this is indeed the correct scenario? And if so would I then have to pay income tax on monies received despite my ex having already paid income tax of £20,900 on the cash in transfer value of her pension pot?

• Is it at all possible that my ex's entire pension pot of £139,000 could be transferred to me into another receiving pension plan with no income tax implications thereby leaving her with a shortfall payment to me of around £54,000.

• Would I be able to take cash payments at all (bank transfer)? Or, would I be bound by having to wrap the pension part of the settlement figure in another pension?

• And as a possible final option my ex has a defined benefit/final salary pension maturing at age 60 (4 years away) currently projecting a full pension of around £15,000 pa or £78,000 lump sum and £11,700 residual pension. Could it be a possibility to access a lump sum at this time with residual pension payable at age 60?

I am so long out of the financial systems in the UK and find it has grown in all sort of directions since my days in the industry. I'm just very confused as on paper it looks straight forward but i'm aware these matters rarely are. We do still have IFA friends who I guess we will consult once we have a grasp of possible options.

Any help or advice you can offer to start the ball rolling for ideas would be most appreciated.

elouise01582

If your ex were to totally encash her £139,000 DC pension and if she has no other income then she would not suffer 20% on 75% of the funds.  If she was in England she would end up with £108,950.  Not sure how much of a difference the Scottish tax rates will make however someone else on here can no doubt do the calculation.  Then she has only around another £84,000 to find.  If the encashment could be done over across the 20/21 and 21/22 tax years then she can likely avoid even more income tax being paid on the encashment. I used the Aviva pension withdrawal tax calculator to ascertain the amount of income tax likely to be deducted.  Doing this would also involve your ex claiming back the overpayment of income tax that will be paid upon encasement and passing that tax refund to you.

elouise01582

According to the HL calculator the amount after Scottish tax and the tax refund would be £106,844.  Hope this helps you and her.

Thrugelmir

A pension sharing order needs to be obtained through the courts. Your solicitor should be aware of this. The monies will need to be transferred to a scheme in your name. 

TVAS

First of all do you use Transferwise to transfer sterling to euro it is the best retail rate and takes minutes. My husband lives in Spain I transfer money to him and it takes minutes for him to receive it.

Second https://www.which.co.uk/money/pensions-and-retirement/pensions-retirement-calculators/pension-tax-calculator-af1sc5u1y9mc shows £83,649:

if she takes the payment in month 12 which is March. She will have overpaid the tax is not 20% it is tiered because HMRC calculate the tax as if she wants to take £104,250 each month. This means she will get a tax rebate in April or May because HMRC will no that she has no other income for the previous tax year.  Please do the calculator yourself put in the amount net of tax free cash, tick Scotland and no to lump sum as the figure is net of lump sum.

£83,649 + £34,750 = £118,399. Her taxable income will be £78,187 for tax year 20/21 if she does month 12 March payment. Tax paid £20,600.

If you wait until the new tax year your spouse will have to wait until the following tax year to get a tax refund also the tax she pays will be different because she will be taking it in Month 1 April rather than Month 12 March. Why am I going on about Month 1 and Month 12? We all have a personal allowance of £12,500. PAYE of which pension payments are part of are divided into 12 months so each month you get 1/12th of your personal allowance. Assuming the personal tax allowance remains the same it will be £1,041 in April. This and next March it will be £12,500. Each month the allowance is not used it is added to the next month so the allowance is cumulative . So a payment in April means more tax and longer to wait for any refund in contrast to a payment in March. 

No you cannot access the lump sum from the DB pension now and the rest at 60. As she is ill she can ask if she can take apply to retire early on grounds of ill health from the scheme without a penalty for early payment. If the scheme rules say yes the trustees would ask for a medical report from her doctor. If the answer is no can you wait until she attains 60 to get the rest of the funds as a lump sum?

I would say it sounds like as she is ill she needs to live in Spain it would improve her health. I do hope you invite her for 3 months each winter as you get on so well. Good luck.

elouise01582

Thrugelmir - the OP stated they are doing pension offsetting and not pension sharing.

Thrugelmir

elouise01582 said:

Thrugelmir - the OP stated they are doing pension offsetting and not pension sharing.

Why make matters complex? Drawing cash is going to incur a sizable tax charge. To effect a transfer the pension scheme will require the necessary authority. 

elouise01582

You don't see offsetting much these days - I have certainly not come across it only pension sharing orders but that's the nature of my job I suppose.  I see your point though Thrugelmir.

Dannybhoy

Thank you all for your responses.  We still have a lot to do and discuss.
Yes TVAS i'm a regular user of Transferwise, great outfit for transferring foreign currency.  And yes, the door is open should my ex wish a free holiday.