Associate solicitor Peter Hilton, in our Family Law team, explains the impact of upcoming changes to pension legislation on those separating and divorcing.
Many will be aware of the upcoming changes to pension legislation enshrined in the Finance (No.2) Act 2023, coming into force on 6 April 2024.
Under current legislation, the Lifetime Allowance (“LTA”) on pensions stood at £1,073,100. Income drawn from pensions at a level above an annually assessed cap was subject to a 25% tax charge, in addition to paying the relevant rate of income tax. Lump sums in excess of the allowance were subject to an immediate 55% tax charge.
The Finance (No.2) Act 2023 stands to abolish the pension lifetime allowance entirely from 6 April 2024. However, it is worth noting the LTA has been functionally abolished. From 6 April 2023, the tax penalty for pensions drawn in excess of the LTA was reduced to nil. Pensions drawn before that date may still have Lifetime Allowance considerations, and specialist financial advice should be sought in those cases.
The tax-saving reforms will be welcome for pension savers, family lawyers and financial professionals advising clients on setting up their financial arrangements post-separation.. Abolishing the LTA removes a significant headache when it comes to implementing and advising on pension sharing orders – especially when financial advisers need to assess what each party could reasonably expect to receive as income on retirement after a pension sharing order is in place. Some hangovers from the previous regime remain. Whilst the LTA for pension savings and income drawings will shortly be abolished, there remains a lifetime allowance in respect of tax free lump sums.
Under the new legislation tax free pension lump sums will effectively remain capped at £268,275, being 25% of the LTA as it stood in 2023. Whilst pension savings can now exceed £1,073,100, any lump sum drawn in excess of the lump sum allowance will be taxed.
Pension benefits from any UK pension scheme already taken may also have used up part of the total allowance, meaning the lump sum that can be drawn without being taxed is effectively less. Financial advice may be required to determine what balance of the allowance remains.
If you are considering divorce, be careful of assuming that sizeable lump sums drawn from pensions may be available entirely tax free.
If considering a divorce which entails a division or sharing of pensions, you should always take professional advice.
Blandy & Blandy LLP are well placed to advise when pension sharing might be a good option, and to work collaboratively with financial experts to ensure a fair and tax efficient division of pension income between a divorcing couple, as well as advise when actuarial input might be required.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
