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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Current pension legislation will generally not permit pensions and pension commencement lump sums below the age of 55. There are some exceptions, most notably the uniformed services schemes (police, armed forces, fire service etc.). Also some individual pension scheme members may have preserved rights to take pensions below age 55 and those suffering a terminal illness with a short life expectancy may be able to take benefits early.
If none of these circumstances apply, taking benefits below age 55 is likely to be treated by HMR&C as an “unauthorised payment”, which attracts a tax charge at the unattractive rate of 55%.
Pension Liberation is not the same as Pension Unlocking. Pension unlocking is where someone aged over 55 may take a pension commencement lump sum of up to 25% of the pension value.
So called Pension Liberation schemes are becoming increasingly prevalent and some of these are actually pension liberation frauds. The fraud is typically perpetrated on the vulnerable; particularly those who are in desperate need of cash. Individuals going through divorce or dissolution of a civil partnership are therefore potential targets for the fraudsters.
Pension Liberation or Unlocking becomes fraud if the individual is not informed of the tax consequences fees involved or how the balance of the pension savings are invested.
The schemes generally work by transferring pension funds to a new arrangement from which the cash sum is paid. As part of the transaction, a commission or arrangement fee is charged, often as a deduction from the balance of the transferred fund. These charges typically range from 10% to 30% of the total fund value. It is the responsibility of the pension scheme member to tell HMR&C if they take such a payment at which point they will have to pay the tax. Failure to declare the transaction can incur a penalty and interest charge in addition to the tax on the sum received.
At worst, there may be nothing left of the pension once the exercise is complete – apart from a substantial and often unexpected tax liability.
The Pensions Regulator is holding an urgent summit to address the fraud problem.
Further information is available on the Pensions Regulator’s website at http://www.thepensionsregulator.gov.uk/regulate-and-enforce/pension-liberation.aspx and HMR&Cs website at http://www.hmrc.gov.uk/pensionschemes/liberation.htm .
To repeat what is said on the Pension Regulator’s website - “ …. If something sounds too good to be true, it invariably is. …”