Over a year has passed since the introduction of ‘pension freedoms’ contained in the Taxation of Pensions Act 2014. The ability of the public to treat certain pension schemes as akin to bank accounts raises significant issues for parties who are either going through divorce, or are contemplating divorce.
Perhaps the biggest impact of the pension freedoms are that holders of a defined contribution (money purchase) pension scheme are now able to withdraw funds from their pension scheme after they reach the age of 55. Rather than a pension fund being ‘locked away’ until retirement age, the fund is now accessible at a much earlier age. An expensive sports car, luxury holiday or a deposit for a child’s first property purchase are all within arm’s reach. The evidence so far suggests that the freedoms have been very well received and pension holders have not been discouraged by the significant tax consequences applicable to pension withdrawals.
Let’s consider an average divorce scenario where the wife wishes to retain the former matrimonial home. In order to retain the home, she has to pay a lump sum to the husband. However, raising that lump sum can often be problematic. If there is little equity in the home or the wife has a limited income, obtaining a lump sum from a re-mortgage may be impossible. However, if the wife has a defined contribution pension scheme, she has a valuable tool at her disposal to raise that lump sum. Problem solved. Good news all round? That would be no.
Whilst the freedoms can be advantageous, they can also cause significant problems. Let’s consider a scenario where the husband and wife separate in 2010. He is aged 53 at that point. Neither of them takes any steps to obtain a divorce. The only meaningful asset of the marriage is the husband’s defined contribution pension scheme, valued at around £60,000. Prior to the pension freedoms, the wife had little course to worry. The husband’s pension was locked away until he reached retirement age and he could not touch it before then.
In 2016 the wife becomes aware that the Husband has been spending money on expensive holidays and household gadgets. Such spending is entirely out of his usual character. Where has this money come from? You can take a guess. The wife issues divorce proceedings and asks the court to consider the resolution of financial matters. By the time the matter comes to court the husband’s pension scheme has been emptied. The husband has no money in his bank accounts. He has spent everything he received from his pension. There are no other assets of the marriage. What can the court do?
The answer in the above circumstances is, sadly, very little. The court does have the ability to make an injunctive order against the husband that would prevent him from withdrawing money from his pension scheme or spending money that has already been withdrawn. However, if his pension scheme is at zero and his bank account is virtually empty, such an order would provide the wife with little comfort or benefit.
If you are separated and have not yet resolved financial matters from your marriage, or if you are going through divorce where pensions are likely to be involved, expert advice is essential.