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March 16, 2023updated 17 Mar 2023 12:30pm

Pension reforms may ‘drastically’ impact HNW divorce, experts say

By Will Wainewright

The chancellor’s big surprise of scrapping the lifetime allowance on pensions in the Spring Budget 2023 is likely to influence the divorce settlements of HNW couples, experts tell Spear’s

The abolition of the lifetime allowance (LTA) on pension contributions announced in the Budget could have an unexpected impact on divorces among the wealthy, advisers say.

Matthew Taylor, partner and head of Liverpool and Chester office at Stowe Family Law, says the move could have a ‘drastic impact’ on financial negotiations following divorce for those previously hit by the LTA.

To share or not to share

Chancellor Jeremy Hunt’s surprise move to end the LTA was part of measures designed to increase financial incentives and boost the workforce, particularly in the health service.

But Ceri Griffiths, founder of Willow Brook Lifestyle Financial Planning, told Spear’s the decision will also impact how high-net-worth divorce plays out.

‘Where high-value pensions are being offset, where the values used could now be some tens, or hundreds of thousands of pounds out — review and renegotiation may be needed.’

She believes pension-sharing appetites may now change.

‘Historically it has often made sense for the party with the large pension to share — to avoid a lifetime allowance charge and to reopen the door to being able to use pensions for earning tax efficiently, but with the LTA abolition we are likely to see this view shift.’

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‘Drastic impact’ on HNW divorce

Taylor agrees it could have unexpected and far-reaching ramifications.

‘Where parties have agreed that there is to be a pension sharing order made in respect of such a fund following divorce, the percentage of the fund to be shared may now need to be recalculated to reflect the increased net value of that fund,’ he says.

This could be problematic where a large pension fund is not to be shared, but rather the non-pension holder is to retain a greater proportion of other assets to ‘offset’ the pension wealth retained by the holder.

Matthew Taylor and Ceri Griffiths
Matthew Taylor of Stowe Family Law and Ceri Griffiths of of Willow Brook Lifestyle Financial Planning

‘The value of the retained pension has now dramatically increased given the reduction in tax to be paid on receipt of funds – whether as income or a lump sum – or following a crystallising event such as transferring the fund overseas or reaching age 75 with unused pension benefits,’ he says.

‘A failure to recalculate the value of the fund without accounting for the LTA could see non-pension holders lose out.’

HNW pension negotiations will likely become more complex as a result. Pension sharing has been seen as an ‘attractive settlement route’ as it could minimise or eliminate tax paid due to LTA.

‘That advantage no longer applies which may lead to more arguments about whether pensions should be shared or not.’

Timing is everything in HNW divorces

Peter Burgess, co-founder of family solicitors firm Burgess Mee, cautioned that the Labour shadow cabinet have already said they would re-introduce the LTA.

‘So there may be pressure on couples to agree a pension share after any measures come in but before the LTA is re-introduced after an election if Labour win.

‘There may well also be a policy u-turn on a measure which gives the appearance of a handout to a small minority at a time when belts are tighter.’

It’s now more vital than ever that all parties take relevant advice before finalising settlements, particularly the non-pension holding spouse, according to the advisers.

No gain no loss

The consequences of the end of LTA are not the only changes of note to divorcing couples contained in the Budget.

Capital gains tax (CGT) changes announced in the Autumn statement will finally come into legislation following the Budget, in effect giving HNW couples more time to sort out their affairs while they separate or divorce.

‘Currently, married couples and civil partners can only transfer chargeable assets between themselves, without triggering a charge to CGT, up to the end of the tax year in which they separate,’ explained Alison Palmer, private client partner at Mercer & Hole, in a statement.

Asset transfers after this date are treated as taking place at market value, thereby producing possible CGT charges.

The new tax legislation will mean asset transfers between couples going through a separation or divorce will be treated as occurring at ‘no gain no loss’ for up to three years from the end of the tax year of separation from a CGT perspective.

The new rules will kick in from 6 April, the start of the new tax year.

‘This will come as a welcome relief, particularly to couples who parted late in a tax year and would otherwise have very little time to plan the division of their assets tax-efficiently,’ adds Palmer.

The ‘no gain no loss’ treatment will apply for any longer reasonable amount of time that may be required where assets are being transferred under a court-approved divorce or dissolution agreement.

Griffiths calls this a ‘logical, and much-needed change which gives couples the opportunity to thoroughly review finances before making any hasty changes on separation.’

Order your copy of The Spear’s 500 2023 here.

Will Wainewright is the founder of hedge fund and private markets news site Alternative Fund Insight

Cover image: Shutterstock

More from Spear’s:

What the 2023 Budget means for high earners 

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