The over-50s now account for the biggest increase in the divorce rate, according to government statistics.
These so-called silver splitters have had the chance to make pensions contributions over the longest period when there was a more incentivised tax regime and higher investment returns — and as a result, the pension pots will often be extremely sizeable and one of their most valuable assets.
They will therefore play an important part in a divorce settlement — not just because of the monetary value but also because the court has the power to transfer the pension pot between the parties on divorce.
Traditionally this has been used to provide an income to the weaker financial party (usually the wife who has given up work to raise the children) when the main breadwinner retires, enabling maintenance payments to cease.
With last year’s private pension reforms allowing the whole pension fund to be treated as cash once the holder is 55, the treatment on divorce for the silver-splitters is a whole new ball game and is enabling assets to be distributed in more innovative ways.
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No longer does the fund have to be invested in an annuity or used as drawdown until the pensioner reaches 75. Now the first 25 per cent of the pension pot can be taken tax free and the remainder can be cashed, but taxed at an individual’s highest rate. This means instead of it being an income stream, it can be a capital fund.
In most divorce cases, the matrimonial home is sold to fund the purchase of the two homes that are usually required. The reforms mean that the pension fund can now be used to provide capital to buy a second home, thereby avoiding the disposal of the family home. With property, certainly in the southeast, outstripping investments, maintaining capital in property makes sound financial sense — particularly when it can always be traded down later to release capital or used for equity release.
With stamp duty now running at 12 per cent for properties valued at more than £1.5 million, the saving on stamp duty alone is worth considering. A £2 million home attracts £153,750 in stamp duty land tax, let alone the attendant estate agents commission on sale and moving costs.
A pension sharing order can be made, moving the pension fund to the weaker financial party where it will attract a lower tax rate when it is cashed in by them. Take, for example, a pension pot of £500,000 and a non-working wife. The first 25 per cent — £125,000 of the pension pot — is tax free. Tax of £154,850 will be incurred on liquidating the balance. Less, if the liquidation can be spread over tax two years. All of a sudden, liquidating the pension fund is far more attractive compared to the cost of selling and purchasing a new property.
While previously pension funds on divorce were treated as an illiquid asset and valued on the basis of a “CETV” value (cash equivalent transfer value), which is a notional sum, now they can be treated as a liquid asset and valued on the basis of the amount they would be worth if cashed immediately, less any tax that would need to be paid.
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Frequently parents want to pass on money to children on divorce rather than to their former spouse, and so another advantage of the reforms is that new strategies can be developed to use the pension pots to provide tax-beneficial inheritances to children. The sky is the limit — at least until the current rules change again.
Frances Sieber is a partner in the family team at Spring Law