Divorce and the abolition of Lifetime Allowance

Yesterday, Jeremy Hunt’s Spring Finances included the abolition of the pension Lifetime Allowance (LTA), which can apply to all members of registered pension schemes following it’s introduction on sixth April 2023.

Right here, Stowe Companion, Liverpool-based Matthew Taylor, seems on the implications for divorce monetary settlements.

How Pension Lifetime Allowance adjustments affect Divorce

The abolition of the Lifetime Allowance (LTA) introduced within the UK’s Spring Budget, might have a drastic affect on monetary negotiations following divorce for anybody who beforehand would have been hit by the LTA because of holding a pension fund valued at over £1.07m.

In conditions the place a pair has agreed to have a pension sharing order made in respect of such a fund following a divorce, the share of the fund to be shared might now must be recalculated to replicate the elevated internet worth of the fund.

This may increasingly even be problematic, the place a big pension fund is to not be shared, however as a substitute the non-pension holder is to retain a larger proportion of different property to ‘offset’ the pension wealth retained by the holder. 

The worth of the retained pension has now dramatically elevated, given the discount in tax to be paid on receipt of funds – whether or not as earnings or lump sum – or following a crystallising occasion, similar to transferring the fund abroad or reaching age 75 with unused pension advantages. 

Failure to recalculate the worth of the fund with out accounting for the LTA may see non-pension holders lose out.

An unintended affect of the abolition of the LTA could also be to make excessive internet value pension negotiations extra complicated.

Whereas beforehand, pension sharing may very well be a horny settlement route, because it may minimise or get rid of tax paid as a result of LTA, that benefit not applies, which can result in extra arguments about whether or not pensions ought to be shared or not.

Given the scope of those adjustments, it’s vital that events – significantly the non-pension holding partner – take authorized and monetary recommendation earlier than finalising any settlement.

Helpful Hyperlinks

Do you break up a pension when divorcing?

Divorce & the Gender Pension Hole