This blog is intended to encourage an exchange of ideas and promote debate about the financial issues that arise in a relationship breakdown. The concept is to create a platform for discussion that is not available elsewhere. Aimed mainly at professionals working in this area; lawyers, accountants, financial advisors and actuaries, it is also a potential source of information for the general public.
In our experience there is a significant variance in how professionals handle pension assets in divorce, with little consensus on which methods give the best outcome. We feel this is due in part to a lack of centralised knowledge and debate on what can be a complex issue. We intend to address this by posting our original articles on key subjects, as well as those contributed by others. Our intention is to post quality, discussion-worthy topics at least once a month, or more often if the need arises.
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In January the Department of Work & Pensions published a White Paper The single-tier pension: a simple foundation for saving followed shortly afterward by the draft Bill. This article looks at these changes in the context of pensions on divorce and dissolution. For simplicity this will be just referred to as divorce.
The advent of pension sharing ushered in the possibility of a clean break regarding pension assets that was previously only available by offsetting pension assets against other assets. Consequently in the majority of cases only pensions built up to the point of divorce or dissolution are considered in the financial settlement. Viewed in this context many of the important changes in the draft Bill will have little impact for current divorce settlements.
As drafted, the Bill will withdraw the substitution entitlement in Section 48 of the Social Security and Contributions and Benefits ACT 1992. These substitution rules entitle an ex-spouse or civil partner to substitute their former spouse or civil partner’s National Insurance record for their own if this would give them a higher Basic State Pension. Effectively, the substitution entitlement is to be retrospectively withdrawn for anyone who reaches SPa after 5 April 2016, irrespective of their date of divorce.
The proposed retrospective demise of the substitution rules means that it may not always be appropriate to disregard BSP as was previously the case. This is largely a matter of judgement or agreement between the parties. If both have a very similar current entitlement it might be considered reasonable to disregard BSP in any income equalisation calculations. Or if the current BSP entitlements are very small it may be decided to ignore them.
This summarises our current broad views on the draft legislation and changes. None of the above represents advice as to a particular course of action or inaction. BDM, it directors and employees accept no liability for any action taken or decisions made arising in any way from these comments.