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The most radical changes to pensions in almost a century

When Mr Justice Singer decided TvT (Financial Relief; Pensions) [1998] 1 FLR 1072, he commented on pension valuations incorporating various assumptions and being only a guide for the court as follows:

‘. . . the only fact that can be predicted with absolute accuracy is that the prediction will turn out to be inaccurate’.

In Martin-Dye v Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901 the Court of Appeal considered an appeal against an order concerning the treatment of the pensions of the parties in trying to achieve a clean break. Thorpe LJ and Dyson LJ concluded that a pension is not equivalent to other forms of asset and should instead be the subject of a pension sharing order:

‘… the quality of pension in payment differs so significantly from that of the other property, that a result which left the husband with a vast majority of the former, as a major part of his share of the property, was not fair’.

Where are we now?

Initially proposed by the Chancellor of the Exchequer in his March 2014 budget and confirmed in the Taxation of Pensions Bill published on 14 October 2014, the government is introducing radical changes in pensions that apply from 6 April 2015. The significant changes include:

(1) Freedom in taking tax free cash Currently, in the majority of cases, up to 25% tax free cash can be taken from a pension fund. From 6 April 2015 you can still take 25% tax free but you may also be able to make subsequent withdrawals from your fund – as much as you like, with the capital withdrawn being treated as income in the year it is withdrawn and thus taxed at your highest marginal rate.

(2) Defined benefit schemes From April 2015 most members of a defined benefit pension will be able to take advantage of the new rules and make unlimited withdrawals. This will mean, however, that they have to transfer to a defined contribution scheme. The Book of Common Prayer, in respect of marriage, uses the words, ‘nor taken in hand unadvisedly, lightly or wantonly, to satisfy men’s carnal lust’. Replace ‘men’s carnal lust’ with ‘people’s desire for profligacy’ and the Book of Common Prayer sends out a good message.

(3) Death tax From April 2015 if you die before age 75 and have not taken any tax free cash or income your beneficiaries on your death can take the whole pension fund as a tax free lump sum or draw down a tax free income from it. If you die at age 75 or over the tax is payable upon withdrawal of the money by the beneficiary at their highest marginal rate of tax or at 45% if a lump sum is taken in the tax year 15/16.

In addition to the above changes, keep an eye out for the retirement age increasing. At present, you can draw on your pension from age 55. Form 2028 is set to increase that to 57 and then rise in line with state pension age. What does all of this mean to the divorcing couple? We suggest that some of the considerations include:

(a) Is there a risk of dissipation on a 55th birthday or after that event? The marriage is in difficulties. Parties are both over 55. Husband cashes in the pension taking a significant tax hit on the 75% of the fund which does not attract the tax relief. Husband invests unwisely/spends some. Twelve months later the couple divorce. What then? Are couples contemplating divorce more likely to be proactive before the pension holders 55th birthday to prevent dissipation/to preserve the asset?

(b) Does the Martin-Dye approach still hold good? Is the case now much simplified for defined contribution funds held by husband or wife after age 55? Given that the entirety of these funds can now be taken as cash (albeit some taxed) is there not an argument to take such pensions out of the pension section of Form E and consider it as any other non-pension capital asset where, upon realisation, there may be a tax charge? Should we, therefore, distinguish between defined contribution funds pre age 55 and defined contribution funds post age 55?

(c) The potential treatment of a defined contribution fund post age 55 as a possible non-pension capital asset does not, however, get around the ever thorny issue of the inequality in one party being a member of a defined benefit scheme and one a defined contribution scheme.

(d) What happens if pension sharing orders have previously been made? Is it fair to assume it should be treated as an income stream in retirement – presumably the intention when the order was made?

(e) What assumptions should the judge make about the future use of a pension share? Are annuity tables of any use?

Case study

In 2012, Mary and John divorce following a 28-year marriage. Mary is 53 years of age and is a full time mother to three dependent children aged 15, 10 and 9. John is 50 a partner in a successful law firm where he has averaged profits of £475,000 pa net for the 3 years up to and including the tax year of divorce. The parties cannot resolve matters so the court is required to determine their respective claims with the outcome that:

(a) John pays child maintenance of £15,000 pa per child.

(b) John pays school fees (£20k per child).

(c) John pays spousal maintenance expressed as a joint lives order in the sum of £85,000 pa with annual RPI increases.

(d) A pension sharing order is made in respect of John’s one and only pension scheme to provide for equality of fund value –leaving each party with £400,000.

(e) Capital is split to provide Mary with £950,000 with which she buys a mortgage free home and John with £780,000 with which he requires the aide of a mortgage to buy alternative accommodation.

(f) The court makes a finding that Mary has a very modest earning capacity of £10,000 pa that she can exercise now.

The above outcome does not provide for automatic termination of spousal maintenance at John’s retirement. It does not provide for a term order – to John’s 65th birthday – and the judgment making clear that maintenance will need to be revisited at retirement as the judge concludes that at some point capitalisation of maintenance might be appropriate and or variation depending on John’s income in the future.

Would a fair assumption be that Mary should be assumed to have £400,000 of pension which will remain under the wrapper of a pension investment at her March [2015] Fam Law 291 Articles retirement? A pension fund of £400,000 at age 53, pursuant to a pension sharing order, may perhaps be worth c £544,000 at age 60 (assuming an investment return of 4.5% pa). With a fund worth £544,000 on her 60th birthday, Mary may be able to buy annuities on the following basis:

  • c £27,000 pa as a level, non-increasing, annuity;
  • or c £16,000 pa as an annuity which increases each year in line with RPI.

Do those assumptions hold good in the light of the new legislation? The pension share was not conditional – namely – it will produce sufficient income in retirement with state pension to ensure Mary can meet her then income needs.

Take the following scenario. On her 55th birthday, Mary decides to add an extension to her house and takes her tax free lump sum of £110,000 from her fund and extends her property successfully – adding some £165,000 worth of value to the property. At that juncture, Mary’s pension fund had grown from £400,000 to £437,000, and thus in taking £110,000 as tax free cash her fund had reduced to £327,000. Inspired by her successful venture, Mary sets about buying a student let in Bristol where the parties’ eldest daughter wants to go to University. Mary again draws down another chunk of pension – needing £135,000 to buy the student let she needs to draw down c £225,000 gross from her pension fund (allowing for income tax on the release of funds) and completes the purchase putting the property in the joint names of herself and the parties’ eldest daughter.

In 2022 John, aged 60, seeks a downward variation because:

  • The provisions of his partnership agreement provide for compulsory retirement at age 60.
  • His partnership will offer him an ongoing salaried position on a part time basis at a much reduced income of £100,000 pa net.

John has not drawn down on his pension – his fund, originally £400,000 has grown because he has added £300,000 of further contributions to it since the 2012 decision and with active investment strategy is now worth £985,000. It will produce:

  • A flat rate single life annuity of £49,250 pa.
  • Or an RPI index linked single life annuity of £29,550 pa.

Mary’s fund was reduced to £102,000 at age 55 by virtue of her withdrawals of £110,00 tax free and £225,000 gross for the student let. Assuming 4.5% pa growth, now Mary is aged 63 (when John is aged 60) her fund is worth £145,000 and will produce:

• a flat rate single life annuity of £7,540 pa; or

• an RPI index linked single life annuity of £4,640 pa.

Leaving aside other assets available to the parties to meet needs/produce income/arguments about trading down, what approach does the court take to the disparity in pension income created by the different choices the parties have made in their retirement planning post actual retirement? Retrospectively, what would have been better for John and Mary?

• No pension sharing leaving uncertainty for Mary in the event that John died, he remarried, she remarried?

• Pension sharing with a recital stating assumptions made as to the income producing power of the share at various future retirement dates?

• An undertaking from Mary not to dissipate the fund and to hold as future retirement provision?

• A term maintenance order to retirement – with or without an s 28(1A) order – what retirement date?

• A recital that the intention is once the children have finished full-time education she will trade down and the funds released should be utilised to generate income?

• An undertaking from Mary not to re-mortgage the property she acquires for her and the children?

Of course, in the above scenario, the court has imposed the order so undertakings are not the answer.


Are some new Resolution precedents required? If we are going to pension share where there is a joint lives order or term order with no s 28(1A) order should the same be accompanied by a recital as follows:

‘UPON IT BEING RECORDED that the pension sharing order recorded below will provide the Applicant with a fund worth £400,000. The intention behind the pension sharing order is to provide the Applicant with retirement provision to be utilised by her at a retirement age of her choosing at any point beyond her 60th birthday and the current assumptions as to growth and inflation produce the following results:

  • Single life annuity flat rate at 60 £27,000 pa.
  • Inflationary linked annuity single life at 60 £16,000 pa.’

And that these recorded assumptions are to be borne in mind on any future application for capitalisation and/or variation and/or discharge of the spousal maintenance order. Will and should the court draw a distinction between a needs driven argument for taking cash from the pension and drawing down to provide for luxuries/unnecessary expenditure? What about bad investment decisions?

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