Divorce & SIPPs: Pension sharing case study
In this case study, Elaine Turtle, director, DP Pensions, looks at a particular pension sharing case where a client would have been better off talking to his adviser and his SIPP provider first
As the pension provider we can be the last to know when one of our clients is divorcing and matters can be quite a way down the road by then. Unfortunately, it is also then that we find out what is being discussed and agreed with solicitors may not be possible.
As an example of what can go wrong, let’s take the case of Bill who was divorcing his wife who was European. In order to reduce the financial complications, he decided it was best to divorce her in the country she was originally from – not in the UK. The divorce process was all dealt with through solicitors, although Bill had chosen to do this outside of the UK he did have a UK solicitor. The divorce went through, at which point Bill went to his and informed him they had agreed in the court that his wife was to have half of his pension – this was around £200,000 – so not a small sum.
Bill’s adviser contacted us, the pension provider, and asked when the payment could be made. We explained that we would need to see a copy of the Pension Sharing Order (PSO). Pension sharing was introduced on 1 December 2000 and allows a member’s pension savings to be split at the point of divorce.
A PSO allows for the physical split of a member’s pension entitlement so that part, or all, of it is transferred to their ex-spouse’s or ex-civil partner’s pension arrangement. The reduction in the member’s benefits is known as a ‘pension debit’, and the amount allocated to the ex-spouse or ex-civil partner is known as a ‘pension credit’. The ex-spouse or ex-civil partner will often transfer the pension credit to a new or existing pension arrangement but, if the occupational scheme trustees offer it as an option, the credit can be left within the member’s scheme.
Spanner in the works
When the divorce agreement arrived it was of no use to us as it was an agreement from a court outside the UK and did not contain a PSO. A foreign court has no jurisdiction to make a pension sharing order against a UK pension arrangement. We had checked with our pension solicitors and they confirmed that the only way we could move monies to his ex-wife’s pension plan was to have a PSO. Bill and his adviser were taken aback by this and took matters up with their solicitors in the UK, who confirmed that what we had told them was correct.
The relevant court order would need to be made under Part III of the Matrimonial and Family Proceedings Act 1984 (or the equivalent Scottish legislation) and follow the usual format of a UK court order, quoting the UK plan number and the relevant percentage or amount (Scotland only) to be shared. We also pointed out that the ex-wife would have to have a pension plan in the UK for this to work and that she may have trouble opening a new pension plan now – especially as we understood she lived abroad. A transfer to a QROP could have been considered but it was discovered she did have a pension plan in the UK that would take benefits in from her ex-husband’s plan.
After much to and froing Bill eventually did obtain the relevant PSO and the funds were paid over to his ex-wife’s pension plan. Proceeding in this way has cost the client a lot more, his adviser does not understand why he did not talk to him or us before doing this.
Pension Sharing and Lifetime Allowance
As an aside, we were also asked by his adviser how this would affect his lifetime allowance and if he could make up the funds he had given away. The legislation on this will depend on when the PSO took place and whether benefits were in payment at the time of the Order.
In our case the member’s PSO was after 6 April 2006 and he had not taken benefits from his pensions yet. There is no issue preventing the member making contributions, just subject to the normal restrictions on tax relief and the annual allowance, to make up the shortfall. You just have to make sure the member has no form of protection – Enhanced, Primary or Fixed Protection 2014 or 2016, as paying contributions in would cause them to lose their protection. In our case, Bill had no protection so could make contributions going forward.