In recent months you may have read our series about pensions and divorce:
In this third and final article focusing on pension sharing implementation issues, read about some pitfalls to avoid when sharing a pension.
Many of you will know us from the pension expert reports that we produce. Additionally, as a firm of Chartered Financial Planners, we also receive many instructions from solicitors and their clients who are looking for help and assistance after the divorce – particularly in the field of pension sharing implementation.
Over our 20 years working in this area, we have seen many people try and do the implementation work themselves. We see people make the same mistakes repeatedly before they finally deciding to engage with a financial planner to assist with the process.
Understandably, many clients are looking to save on costs and to avoid any further fees. However, this can be counterproductive as the process drags on for much longer than it should do or the wrong decisions are made which could have profound implications for an individual’s financial future.
In this article, read about some of the main pitfalls that we come across when dealing with pension sharing implementation after a divorce.
1. Underestimating how the long the process will take
It is commonly quoted that the transferring pension scheme has four months to implement a pension sharing award once they receive the pension sharing annex. However, I would say that, in our experience, it will often take longer than four months for funds to be transferred to the new scheme.
There are a variety of reasons for this (some of which you’ll discover later in this article), but I would say that a key mistake made by many individuals here is to think that the process will take much less time than it actually will.
We have seen many cases where this has had a significant knock-on impact on the recipient of the pension share being able to get on with their life.
There are two common examples of this.
The recipient of the award wants to use the tax-free cash to purchase a new property as soon as possible
Of course, whilst the money is still in the ex-spouse’s pension scheme then it is not available for the recipient spouse to use it for their new house purchase. Delays in implementation could lead to a house purchase falling through, with all sorts of knock-on consequences.
The recipient spouse needs to draw income from the pension share to supplement their other sources of income
Again, we have seen many instances where, because of delays in implementing the pension share, the recipient spouse has not been able to start drawing an income and this has caused issues with meeting day-to-day expenditure. This is especially acute if the pension fund is the only asset and there is no provision for ongoing maintenance.
2. Not supplying the correct paperwork to the pension providers
A lot of paperwork needs to be completed when implementing a pension share. All pension providers (both the transferring and receiving scheme) will ask for a copy (or original) of each Pension Sharing Annex and a copy (or original) of the decree absolute. Some will also request a copy of the Consent Order.
All these documents need to be court stamped where appropriate.
Additionally, there will be scheme-specific paperwork required by both the recipient scheme and the transferring scheme.
Sometimes it is difficult to know exactly what the transferring scheme requires as this is still in the ex-spouse’s name and obtaining information may be difficult.
It can be unclear as to what their requirements will be until they receive instructions that the pension they administer is to be shared. This will then trigger the process to contact both the member and the recipient of the pension share. It can be a slow process.
Frequently, we see the new provider request funds from the ex-spouse’s scheme only for the transferring scheme to then come up with additional requirements which were hitherto unknown. Until the transferring scheme has all the paperwork that they require they will not start the four-month implementation clock.
Occupational pension schemes (mainly defined benefit schemes) can be extremely particular in terms of what documents and other requirements they need.
For example, many occupational pension schemes insist on getting original documents which may include marriage certificates, birth certificates and passports. They will also require payment of their fees to release the funds (or even to start the process).
Whilst the Pension Sharing Annex references implementation fees and who should pay these, in practice there is no consistent process in place for payments to be made.
Not being able to navigate the maze of paperwork frequently leads to extended delays. We can help clients to work their way through this by doing the “heavy lifting” for them.
3. No new scheme in place
For public sector pension schemes, there is no choice. The scheme will only implement a pension share internally and these will be straightforward.
However, most pension schemes in the private sector (occupational schemes or personal pension style arrangements) will need to send the funds to a new pension scheme – an external pension share.
It is essential that a new scheme is identified to which the funds will be sent. You would be amazed at how many people don’t realise this!
Naturally, selecting a new pension provider can be a daunting task for many people – particularly those that have never had to take the responsibility for investing significant amounts of money before.
Identifying a suitable provider will be based on many factors – a client’s long-term goals, tolerance for risk, need for income, and flexibility. It is a complex process and one that, in our opinion, only very few should attempt on their own.
Working with a Chartered Financial Planner will ensure that all these factors have been taken into account.
4. Not understanding pension Lifetime Allowance issues
In March, the chancellor froze the pension Lifetime Allowance until 2026. As a result of this, more and more people will fall into the Lifetime Allowance trap.
There are potential implications for both the transferring spouse and the recipient spouse as far as the Lifetime Allowance is concerned. Those with pension funds in excess of £1 million should seek financial advice at an early stage to understand whether there will be any implications on this front.
We have come across cases where a more personalised and creative scheme needs to be devised to reduce Lifetime Allowance issues for the recipient of the award.
As an example, it could be that the recipient spouse is able to claim Fixed Protection to set their Lifetime Allowance at a higher level. However, the ability to do this could be lost if the pension benefits are transferred into a new scheme, as opposed to an existing scheme. A large future tax bill may result.
We can give guidance in cases where Lifetime Allowance issues may apply.
5. No financial plan in place
Ultimately, where the money needs to be transferred to, and how the money should be invested, will be determined by what the recipient of the pension share wants to achieve in terms of their future lifestyle and financial planning goals.
Therefore, it is vital that an individual receiving a pension sharing award seeks financial advice as soon as possible. This is likely to mean engaging with a Chartered Financial Planning firm during the divorce so that the financial planner can have input on the eventual course of the settlement.
The planner will also be on hand to provide assistance with cashflow modelling and implementation once the pension share has been agreed.
The evidence is clear, and we know from working with many clients in this area: the benefits of financial planning are huge – peace of mind, a clear plan and confidence for the future. Having a clear long-term plan in place will ensure that the right decisions are made for the pension sharing award.
Working with a financial planner means that clients can avoid the pitfalls highlighted in this article.
We hope that you have found the articles on pension sharing implementation useful and that you have a better understanding of some of the issues that clients need to consider whilst going through the divorce process (and afterwards).
We would be delighted to assist any of your clients who are in this situation. You can be confident that, with 20 years of experience working with divorcing clients, we know this area inside out and can add huge value to your clients.
If you have clients who would benefit from financial advice, or you’d like to find out more about how you can work with BlueSKY, please get in touch. Email firstname.lastname@example.org or call us on 01189 876655.