Pensions have long been one of the most complex and often most valuable assets in divorce, and changes announced in the 2024 Autumn Budget could make them even more difficult to divide.
With pensions set to fall within the scope of Inheritance Tax (IHT) from April 2027, the way they are valued and treated in divorce settlements may need to change.
Decisions made today could have very different long-term implications under the new rules, particularly when comparing pensions with other assets such as property.
With these changes on the horizon, it’s important that divorcing clients fully understand how pensions fit into their overall financial position, both now and in the future.
Read on to find out about the upcoming changes and how they could affect your divorcing clients.
Rules around pensions and Inheritance Tax are changing next year
From April 2027, pensions are set to fall within the scope of IHT. This marks a major shift and could expose a much larger share of clients’ wealth to taxation.
If the inclusion of pensions increases the taxable portion of an estate, the estate could also lose access to the residence nil-rate band, which tapers once the net value exceeds £2 million.
Clients will not only need to factor the new rules into their estate planning, but also into their divorce settlement, as they could significantly affect the tax efficiency of their wealth.
The upcoming changes mean the relative value of pensions could shift
Changes to the tax treatment of pensions may affect how they are viewed in divorce negotiations, and losing their exemption from IHT could alter their value when compared to other assets.
If divorcing clients are considering pension offsetting, the offsetting calculations may need to change.
For example, one party may retain the family home while the other receives a share of the pension wealth. While the property may benefit from the residence nil-rate band, the pension may no longer receive the same favourable treatment under the proposed rules.
This could lead to an imbalance, potentially leaving one party less able to pass on their wealth in line with their wishes.
So, without careful consideration, what appears to be a fair split today may lead to unequal outcomes over the long term.
As such, it is important for divorcing clients to factor in the upcoming changes when considering pensions.
Financial planners can help ensure that the long-term implications of the changes are fully understood before any agreement is reached.
The loss of spousal exemption may necessitate careful planning to help ensure efficiency
Once a divorce is finalised, transfers between spouses are no longer exempt from IHT. As a result, a larger proportion of their estate may become liable for tax.
In light of the changes to IHT and pensions, clients may need to think more carefully about how they use their pension to pass on wealth efficiently.
This could include strategies such as using pension income to fund a life insurance policy held in trust, or making lifetime gifts to reduce the value of their estate over time.
Given the complexity and long-term implications, it’s important for clients to seek advice from a financial planner. They can help clients build a strategy that balances tax efficiency with the client’s retirement needs and wider financial goals.
Financial planners and solicitors can work together to support divorcing clients
When pensions form part of a divorce settlement, both legal and financial assistance are essential to ensure a fair outcome, particularly in light of upcoming changes to pensions and IHT.
Financial planners can help clients understand the true value of their pensions and how different settlement options may affect their long-term financial security.
This includes modelling outcomes under pension sharing or offsetting arrangements, factoring in future IHT treatment, and ensuring that any decisions reflect both parties’ retirement needs.
Meanwhile, solicitors are responsible for managing the legal process and formalising the agreement. They ensure that pension sharing orders are correctly implemented and that the final settlement reflects what has been agreed between the parties.
By working together from an early stage, financial planners and solicitors can help ensure that pension valuations are accurate, tax implications are clearly understood, and settlements are based on a realistic picture of long-term outcomes.
This collaborative approach can reduce the risk of disputes, improve client understanding, and help ensure that agreements reached today remain fair and sustainable in the future.
To find out more about how our sectors can work together for the benefit of our mutual clients, get in touch.
Email info@blueskyifas.co.uk or call us on 0118 987 6655.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
