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  • FIRST POST
    • Thriftydude
    • By Thriftydude 19th Nov 19, 3:26 PM
    • 4Posts
    • 1Thanks
    Thriftydude
    Asking for a friend .... actually, not, asking because Id never thought folk w/could do this ...
    • #1
    • 19th Nov 19, 3:26 PM
    Asking for a friend .... actually, not, asking because Id never thought folk w/could do this ... 19th Nov 19 at 3:26 PM
    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 theyre 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).

    Theyve heard that a colleague (similar circumstances, such as pension) didnt 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 ) out, but it made my friend think about the concept of a tactical divorce to save the LTA cap tax .... but .... they hadnt even considered the impact of separate tax free lump sums or income tax treatment so theres lots more to play for Im 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 isnt your usual MSE conundrum, and morally Im sure the numbers involved may polarize many here with more modest / normal pots, but Im working on the principle that paying as little tax as is legally due holds good for everyone in the UK (i dont 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 dont imagine therell 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. Its maybe also one that tomorrows government may face when it comes to the current GP / doctor crisis as the short term stuff thats 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
Page 1
    • ex-pat scot
    • By ex-pat scot 19th Nov 19, 3:45 PM
    • 340 Posts
    • 466 Thanks
    ex-pat scot
    • #2
    • 19th Nov 19, 3:45 PM
    • #2
    • 19th Nov 19, 3:45 PM
    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
    • By Albermarle 19th Nov 19, 4:28 PM
    • 1,853 Posts
    • 1,189 Thanks
    Albermarle
    • #3
    • 19th Nov 19, 4:28 PM
    • #3
    • 19th Nov 19, 4:28 PM
    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
    • By Notepad Phil 19th Nov 19, 4:30 PM
    • 55 Posts
    • 39 Thanks
    Notepad Phil
    • #4
    • 19th Nov 19, 4:30 PM
    • #4
    • 19th Nov 19, 4:30 PM
    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
    Last edited by Notepad Phil; 19-11-2019 at 4:41 PM.
    • gm0
    • By gm0 19th Nov 19, 4:39 PM
    • 55 Posts
    • 49 Thanks
    gm0
    • #5
    • 19th Nov 19, 4:39 PM
    • #5
    • 19th Nov 19, 4:39 PM
    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
    • By Paul_Herring 19th Nov 19, 4:52 PM
    • 7,008 Posts
    • 3,715 Thanks
    Paul_Herring
    • #6
    • 19th Nov 19, 4:52 PM
    • #6
    • 19th Nov 19, 4:52 PM
    i dont imagine many of us call up and agree to pay more than we need to
    Originally posted by Thriftydude
    https://www.ft.com/content/4b3e6db0-e57a-11e7-8b99-0191e45377ec

    Just 200 voluntary payments of extra tax received in UK since 2000 [to 2017]
    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
    Originally posted by ex-pat scot
    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.)
    Conjugating the verb 'to be":
    -o I am humble -o You are attention seeking -o She is Nadine Dorries
    • DairyQueen
    • By DairyQueen 19th Nov 19, 8:36 PM
    • 1,017 Posts
    • 1,817 Thanks
    DairyQueen
    • #7
    • 19th Nov 19, 8:36 PM
    • #7
    • 19th Nov 19, 8:36 PM
    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
    • By kangoora 19th Nov 19, 9:16 PM
    • 880 Posts
    • 846 Thanks
    kangoora
    • #8
    • 19th Nov 19, 9:16 PM
    • #8
    • 19th Nov 19, 9:16 PM
    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
    • By swanny65 19th Nov 19, 9:55 PM
    • 309 Posts
    • 84 Thanks
    swanny65
    • #9
    • 19th Nov 19, 9:55 PM
    • #9
    • 19th Nov 19, 9:55 PM
    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
    • By Malthusian 19th Nov 19, 11:57 PM
    • 7,080 Posts
    • 11,415 Thanks
    Malthusian
    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.
    Originally posted by swanny65
    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
    • By TBC15 20th Nov 19, 8:36 AM
    • 847 Posts
    • 500 Thanks
    TBC15
    Just a thought, would buying a place in Portugal and taking your pension there get around the tax thing?
    • zagfles
    • By zagfles 20th Nov 19, 8:52 AM
    • 14,782 Posts
    • 13,251 Thanks
    zagfles
    So they transferred out of a DB scheme and as a result ended up with a massive LTA problem? Were the LTA issues explained in detail by the IFA who advised on the transfer? We've seen examples here of IFAs recommending DB transfers without even consdering or accounting for the LTA issues.

    I'd be considering a complaint against the IFA unless all this was fully understood and accounted for
    • Aegis
    • By Aegis 20th Nov 19, 9:04 AM
    • 5,141 Posts
    • 3,507 Thanks
    Aegis
    Just a thought, would buying a place in Portugal and taking your pension there get around the tax thing?
    Originally posted by TBC15
    No, as the double tax treaty doesn't exempt the pension from the Lifetime Allowance. This might be an opportunity to get around a large chunk of income tax, but it's quite a big step to decide to move away from the UK for 5+ years for tax purposes!
    I am an Independent Financial Adviser
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
    • Woby_Tide
    • By Woby_Tide 20th Nov 19, 9:16 AM
    • 5,211 Posts
    • 1,969 Thanks
    Woby_Tide
    Aside from the moral and legal aspect but if they were to divorce and then one died presumably there would be an impact on the spouses pension concept also as those rights would no longer exist. I know with a 1m pot each their lifestyles presumably wouldn't be hindered much anyway but
    • Malthusian
    • By Malthusian 20th Nov 19, 9:59 AM
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    Malthusian
    Aside from the moral and legal aspect but if they were to divorce and then one died presumably there would be an impact on the spouses pension concept also as those rights would no longer exist. I know with a 1m pot each their lifestyles presumably wouldn't be hindered much anyway but
    Originally posted by Woby_Tide
    No problem there (just lots of problems elsewhere). It's now a DC pension so you can make a new Expression of Wish after the divorce, naming your ex 100%.

    There is no "spousal exemption" for pension death benefits as there is with Inheritance Tax - there is no difference in tax treatment whether you nominate your wife, your kids or your cleaner.

    Divorce doesn't invalidate an expression of wish, because an expression of wish has no legal validity in the first place. The trustees have full discretion and an expression of wish is just a suggestion. However, if a nomination to one's ex-wife is dated before the divorce, the trustees are likely to assume it no longer reflected your wishes, especially if there are other potential beneficiaries such as children. So a new expression of wish dated after the divorce would be essential.

    Even with a post-divorce nomination to your ex, it is still possible that the trustees would override your expression of wish and give the pension fund to your children or other relatives if they made an application to the trustees. Rather than to your ex who is not dependent on you and probably living in the Algarve with a fancy man called Pedro by now anyway.

    The big disadvantage is not pension death benefits but everything else. If you died in the middle of a tactical divorce you would likely have a very large and unnecessary IHT bill due to the loss of the spousal exemption.

    On the plus side, as long as you remember to re-do your Will after divorce, your wishes are likely to be followed unless someone dependent on you can clear the high and expensive bar of a challenge under the Inheritance (Provision for Family and Dependents) Act. (If you don't bother re-doing your Will post-divorce, your ex is excluded - it is still legally valid but your ex is treated as if they'd died.)

    If it was a still a DB pension you are correct that the spouse's pension would be lost.
    • Thrugelmir
    • By Thrugelmir 20th Nov 19, 2:52 PM
    • 65,855 Posts
    • 57,998 Thanks
    Thrugelmir
    Married friend has a large pension pot (2m - 2.5m) having left a final salary scheme when gilts were absurdly priced (lucky timing).
    Originally posted by Thriftydude
    How much did the advisor pocket for this advice?

    Gilt prices have been driven to such low levels for good reason. Nothing absurd in the pricing. Time may tell if this is indeed "lucky".

    Odds on the OP returning?
    there really is no such thing as the future, singular. There are only multiple, unforeseeable futures, which will never lose their capacity to take us by surprise.
    ― Niall Ferguson
    • bostonerimus
    • By bostonerimus 20th Nov 19, 7:56 PM
    • 3,479 Posts
    • 2,784 Thanks
    bostonerimus
    Money does corrupt.

    People with a lot of money often seem disposed to do whatever they can to keep it, even if it means breaking tax laws. The ironic thing is that even after paying the tax they are usually comfortable and far better off than most people.

    I live in a US state that has an inheritance tax that starts at $1M and there are ways to hide the money, some of which are dubious and others which are just onerous as it needs companies and or trusts to be set up.

    In the end it's best just to be sensible, keep your nose clean wrt taxes and tell the truth. A poorer honest marriage is far more important that a wealthier dishonesty separation.
    Misanthrope in search of similar for mutual loathing
    • Thriftydude
    • By Thriftydude 20th Nov 19, 8:00 PM
    • 4 Posts
    • 1 Thanks
    Thriftydude
    Thanks everyone for your views so far, sorry if I ought to have been replying in line.

    Ive been away today but managed to speak to my friend this afternoon and they too pass their thanks as theres lots here they had a view on and some they hadnt thought of.

    On fraud, they hadnt considered this. Perhaps because theyre Edinburgh based so covered by what they thought was a difference in Scottish divorce laws. They noted the seriousness of fraud.

    They werent totally persuaded by the evasion argument (because of the above) as a result but I think the volume of views offering that as an opinion is making them think more seriously that way.

    They hadnt thought of all of the alternatives put forward, and were grateful for ideas.

    There were truly surprised at the lack of moral judgement ... it reaffirmed their faith in people but made a wider societal judgement that those with a pension problem, listen well and share thoughts. They said their family (small or no pensions) trotted our the standard youve got to be earning it to be paying it line to them and werent much help.

    On the issue of unintended consequences ... put so well by a few folk, they recognised it and thought thats a personal call and what sat behind their thoughts to do this was who would benefit most from the saving ... with that amount of a pit, it was their kids so they didnt think that an issue but, again, the strength of opinion they found helpful.

    The advisor for the change charged them around 8k to do the TVAS and set up the SIPP.

    On gilts, They didnt know why this was good (that was my recollection as I moved mine at much the same time). From my recollection at the time, from one CETV calculation to the next (99 days apart), my own valuation increased by almost 500k due to gilt values and, when I look at their cost over the last ten years, mine were valued at the lowest recorded cost. My friend chose to twist about two weeks after I did so they would have been close to rock bottom (as it was then, who knows what the future brings - good point).

    My reading is that the jury Is out, but more inputs are very welcome.

    Thank you all ... TD
    • bostonerimus
    • By bostonerimus 20th Nov 19, 8:25 PM
    • 3,479 Posts
    • 2,784 Thanks
    bostonerimus
    I'm often amazed at people's lack of moral deamons. If it feels wrong then it usually is. I'm sure it's possible for legal arguments to be made that it's ok for a happily married couple to divorce and shade the truth in the proceedings and reduce their tax bill. But my rectitude is worth far more than money and I'm surprised how inexpensively some value theirs.
    Misanthrope in search of similar for mutual loathing
    • Thriftydude
    • By Thriftydude 20th Nov 19, 10:37 PM
    • 4 Posts
    • 1 Thanks
    Thriftydude
    @bostonerimus Moral deamons are exercised in many ways in the UK in my own experience. Ask many self employed People if they choose to pay income tax or use the tax efficiency of CGT on dividends and you’ll see it ... I see few who pay what an employed person does ... generally as they pillory the big tech companies for their shameless sidestepping of tax too. I know there’s differences in other areas but it’s really not a level playing field out there.

    Of course, everyone pays what they’re due to pay within the UK’s tax jurisdiction, so no one is doing anything wrong - no ?

    Personal fibre, and the strength of the moral compass will direct the steps that folk take.

    I may live in different circles to you, but I know many who will side step taxes soon as look at you, some even brag about how little they pay - in some cases bragging to have paid zero in tax for seven consecutive years, whilst living the high life with booze fueled weekends and foreign holidays as far afield as Australia .... whilst saying the ‘rich’ should pay more.

    Don’t get me wrong, I pay close to 90k a year in income tax and the only tax rebate I receive is for gift aid donations. It rankles me to witness such selfishness and hypocrisy, but truly, the world we live in is not quite as philanthropic as we’d love to believe at times. TD
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