Pension: Claer Barrett shares tips to maximise your state pension
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The first financial assets that come to mind in divorce or dissolution of civil partnerships are often property, investments and savings – but pensions, despite often being the biggest asset, are often not included. However, there are benefits to be gained by splitting a pension by both sides, according to an expert, making it a vital area to consider.
Commenting on ‘Divorce Day’, which typically falls on the first full working Monday of the new year and sees a spike in couples seeking to end their marriage after the festive period, Myron Jobson, senior personal finance analyst at interactive investor, said: “Divorce is a vulnerable time, both emotionally and potentially financially. Many are suffering financial hardship, which may have been avoidable with better guidance, and it is troubling that so many do not discuss pensions during divorce proceedings.
“Pensions can be an extremely valuable asset that should not be overlooked. But our research found that 65 percent of divorcees didn’t discuss pensions during divorce proceedings.”
However, Mr Jobson continued: “Many people don’t know that pensions are typically viewed as a joint asset in divorce proceedings – even if only one spouse has built them up. Given a pension is often the largest asset people have – often even more than their home, it is well worth making sure that is part of the conversation.”
But, while this may seem like it would benefit one person more than the other, there are some circumstances where giving up part of a pension could actually benefit the saver, an expert from Evelyn Partners has said.
Ben Glassman, financial planning partner and head of family and divorce said: “Reducing your pension could bring you below the lifetime allowance limits, and avoid potential tax charges of up to 55 percent being incurred in retirement.”
He continued: “This could prove beneficial for those who have pension pots in excess of £1million.”
The lifetime allowance rules place a cap on the amount a person can save into their pension, which is currently £1,073,100. Anything saved into a pension over this amount is taxed at 55 percent for lump sum withdrawals.
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However, Mr Glassman noted that after divorce, where an individual sees a reduction in their pension pot, it might “prove difficult to rebuild”, particularly if they have triggered the Money Purchase Annual Allowance.
According to Unbiased, the Money Purchase Annual Allowance (MPAA) is a special restriction on the amount a person can pay into their pension and still receive tax relief. This kicks in when a person accesses their pension pot for the first time.
There are various options for how pension assets can be allocated, and each may be more suitable than others, per individual.
According to Mr Glassman, one way includes the “longstanding ‘earmarking’ option”, where the non-pension holder receives regular payments – which ceases on the death of the former spouse.
He said that this option means that the asset remains “firmly in the hands of the pension saver”, who will be liable for tax.
This move has also given way, in many cases, to splitting or offsetting the pension instead.
Mr Glassman said: “When a pension is split, the non-pension holder is awarded a share of the asset, which then becomes their own, so they gain control of how they use it and are no longer tied to the original pension holder.”
But when it comes to offsetting the pension against other assets, Mr Glassman said it can often involve “complicated calculations” as to the cash value of the pension.
He continued: “As such, it might be a more usual option among younger couples, who will not have had the time to build up significant pots.”
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