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Budget 2014: A Paradigm Shift in the Treatment of Pensions on Divorce

  • By Miles Hendy
  • 21 Mar, 2014

The March 2014 budget has changed the financial planning landscape dramatically with the single biggest shake up to pensions in our lifetimes. The announcement that “no one will have to buy an annuity” turns the personal pension plan from an intangible and illiquid future income stream into a savings account with unrestricted access.  

For people negotiating their divorce now, there needs to be an immediate re-evaluation of your pension’s worth. This article summarises our view of the paradigm shift in pensions and divorce.

The March 2014 budget has changed the financial planning landscape dramatically with the single biggest shake up to pensions in our lifetimes. The announcement that “no one will have to buy an annuity” turns the personal pension plan from an intangible and illiquid future income stream into a savings account with unrestricted access.  

For people negotiating their divorce now, there needs to be an immediate re-evaluation of your pension’s worth. This article summarises our view of the paradigm shift in pensions and divorce.

Unrestricted Access and Off-setting – Is 15% the new 25%?

From 27th March 2014 anyone over 55 with a secure pension income of £12,000 per year can have unrestricted access to their remaining pension pot. The government are also consulting on legislation that if passed would see savers able to fully liberate their pension funds from April 2015 regardless of the size of their pension income. Pension funds can be withdrawn completely with the first 25% paid tax free and the excess added to taxable income.

When offsetting a money purchase pension plan during divorce negotiations a starting point is typically a 25% reduction. This figure in part reflects a deduction for valuing a gross pension fund knowing that it would suffer income tax in the hands of the receiver. It also factors in the willingness of the parties to trade off the pension fund’s uncertain future income stream for the certainty of cash in their pockets today. The change announced in the budget means that one need no longer regard a pension fund as an income product but more like a readily realisable liquid asset.

Peter is 54, earns £25,000 per year and has a pension valued at £100,000. Under the proposal, in a year’s time he could access 25% as a tax free lump sum (£25,000) and have the remaining £75,000 paid over five years at £15,000 per year so that only the 20% basic rate tax is deducted (five instalments of £12,000 is £60,000). In total his £100,000 pension fund can be converted relatively quickly into £85,000 in his pocket.  

So shouldn’t the starting point for offset negotiations on money purchase pensions now be 15%?

Divorce Settlements with New Pension Contributions?

The increased flexibility provides divorcing couples with an opportunity to enhance their overall financial position through making new pension contributions.

Julia earns £81,865 per year and is getting divorced from Chris who earns £25,000 per year and is over 55. Julia invests £40,000 into a new pension at a cost of £24,000 (as the full sum enjoys higher rate tax relief). The couple apply a 100% pension sharing order on the new plan. Under the proposed legislation Chris then cashes in the investment over two years. Each instalment of £20,000 is returned 25% tax free (two lots of £5,000) and the remaining instalments of £15,000 has 20% basic rate tax deducted (two lots of £12,000).

In total, Chris has withdrawn £34,000 into his bank account over a period of one year and a day at a cost of £24,000 of marital assets.

Triviality, Small Pots and Help with Buying Two Homes

Also from 27th March 2014 people with a pension pot worth less than £10,000 who are over 60 can ask for the pot back as a lump sum. The lump sum will be paid 25% tax free and the rest added to taxable income. They can use this small pot rule three times. If after completing this exercise their remaining pots are valued at under £30,000 they can access them under the triviality rule as a lump sum too.

Richard and Tracey each earn £15,000 per year, are 60 and have combined personal pension pots totalling £120,000. There is £200,000 equity having sold their home but they both consider that they need £150,000 now to set them up in new homes.

They split the pension pots evenly to have an equal £60,000 and arrange for a partial transfer so that there is £30,000 in one pension pot and £30,000 in another. The first pot is set up in three segments of £10,000. They exercise their right to withdraw the three segments as lump sums using the small pots rule. They then exercise their right to triviality with the remaining £30,000 pot in the next tax year. After 25% tax free lump sums and after 20% tax on the remainder, Richard and Tracey have £51,000 each in the bank account from their pension funds to add to the £100,000 each from splitting the equity from the sale of the home.

Help with Legal Fees

The small pot rule of £10,000 (and the ability to segment or partially transfer into up to three pots of less than £10,000) means that the over 60s have a new option for paying legal fees. They simply cash in a pension plan. The same rule also presents an opportunity for the tax man to make a small contribution as the following example shows.

John is 60 and his lawyer has presented him with a bill for legal advice of £8,500. He makes a pension contribution of £8,000, grossed up by basic rate tax to £10,000. He uses the new small pot rule and takes 25% tax free (£2,500) and the remaining £7,500 is added to taxable income and after 20% tax is deducted has a further £6,000. He now has the £8,500 to pay his fees.

For Defined Contribution Plans Only

The planned changes relate to Defined Contribution (Money Purchase) pensions only. The government are concerned that the increased attractiveness of Defined Contribution plans could lead to transfers out of Defined Benefit plans and that this might have unintended consequences to the wider economy. Consequently they are consulting on various options, one of which is to ban transfers from Defined Benefit plans to Defined Contribution plans. The consultation paper does not discuss whether any potential ban on transfers might influence whether Defined Benefit schemes will be prevented from insisting on an external transfer to a Money Purchase plan on receipt of a Pension Sharing Order on divorce.

Assuming that external transfers will continue to be allowed for Pension Sharing Credits, the increased access could give rise to planning opportunities for divorcing couples that may not be available to non-divorcing couples.

Jim and Alison are 65, retired, and after selling the marital home and a recent payment of a tax free lump sum they have cash of £500,000. Jim has the only pension; a Defined Benefit pension in payment valued at £500,000. They would ideally like £300,000 of cash each and to equalise the pension. For simplicity we’ll assume the CEV generates the same level of income for each. They apply a 62.5% sharing order so that Alison has £312,500 of CEV and Jim has £187,500. In return, Jim has £300,000 of cash and Alison £200,000.

Alison uses £187,500 of her pot to generate an income for life commensurate with Jim’s income. She uses the remaining £125,000 to withdraw tax efficiently at 20% basic rate over a few years and it generates £100,000 of cash after tax.

Greater Demand for Multi-Disciplinary Collaborative Practice?

Buying an annuity meant that people had an income guaranteed for life and didn’t need to worry about whether they might run out of money. They also didn’t need to worry that they might be too cautious and die leaving too much money that they could have enjoyed. That’s ultimately the area where modern financial planners thrive – helping people make informed decisions about how best to spend their wealth, to manage investment risk and to manage their wealth tax efficiently. Now there will be an increased number of people needing to manage their pots into retirement, many of whom would unquestionably benefit from a Financial Planner helping them manage their finances.

The government recognise that this change will introduce more choice and complexity for citizens and part of their announcement included a guarantee that pension savers will have access to face-to-face, impartial financial advice at the point of making a decision. This advice could include a suggestion to seek further full independent financial advice.

The government also cite Australia and the United States as countries with similar unrestricted access to pension funds as is proposed to apply here. In both countries financial planners often play a more integral role in collaborative divorces than has been the case in the UK. These changes could be a catalyst for greater involvement of financial neutrals in collaborative cases, and even greater desirability for collaborative divorces, in a world where personal finance choices, options and complexity have increased considerably.

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It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.

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By Richard Ellis 01 Mar, 2017

Markets made a much better start to the year compared to this time last year. However, investors remain wary of problems that are likely to rear their heads later in the year and so, in general, markets have paused for now. Politics seems likely to dominate sentiment again this year, with a number of key general elections to be fought in Europe, most notably in France and Germany. Volatility is likely to spike during these events. However, market volatility can be the friend of the active fund manager and in recent meetings and conference calls with managers many have expressed the view that there are plenty of good opportunities and are generally cautiously optimistic about prospects for the year as a whole.

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By Mark Fletcher 31 Jan, 2017

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.


  • UK equity markets continued to rise in December, ending an initially volatile year on a strongly positive note. On the back of a “Santa Claus” rally, the FTSE All-Share index closed the year at an all-time high.
  • As was so often the case in 2016, the mining and oil & gas sectors fuelled much of the rise; following agreement by OPEC members on a production cap, the oil price hit its highest level since 2015.
  • On the macroeconomic front –the Consumer Price Index (CPI) rose by 1.2% in the 12 months to November 2016, its highest level in two years.
  • Market expectations of the impact of Brexit in 2017 weighed on sterling, which faltered against the Euro and US Dollar into the Christmas period.


  • The fed raised the interest rate by 0.25% in December. It also announced its intention to raise interest rates three times in 2017, the central bank indicated that it would likely raise interest rates by 0.25% each time.
  • The post-US election rally saw the S&P 500 index hold onto the previous month’s gains to post solid returns of 1.98%.
  • Stock sectors, led by so called ‘defensives’, across the board recorded positive monthly returns
  • The US Manufacturing Purchasing Managers Index (PMI) hit a 21-month high.
  • US Manufacturers reported stronger hiring and higher prices for raw materials, which support other signs of labour market strength and higher inflation, pointing to improving manufacturing conditions.
  • December also saw consumer optimism about the state of the US economy increase to the highest level since August 2001
  • US GDP growth for the third quarter 2016 surprised markets with a better-than-expected growth rate of 3.5%.
  • Positive contributions to GDP growth came mainly from exports, private inventory investment, personal consumption expenditure and federal government spending
  • In a sign that the post-US election rally was expanding, investors regained interest in so-called ‘defensive’ sectors while profit taking by investors weighed somewhat on the performance of financials stocks
  • Healthcare shares lagged most other sectors during the month. In particular, biotechnology companies in the S&P 500 tumbled the most since October 2016 after Trump declared himself an opponent of high drug prices.


  • European equity markets advanced in December, posting one of the best monthly performances in 2016.
  • Markets surged in the aftermath of the Italian referendum, a political event which had been significantly weighing on sentiment over the last few months.
  • With the vote out of the way, market participants regained confidence amid increased talks of fiscal stimulus globally, aimed at spurring economic growth.
  • Within European markets, cyclical sectors (more sensitive to economic cycles) continued to perform strongly, reversing the trend observed in the early months of 2016 where deflationary fears dominated investment decisions
  • On the macroeconomic front, the month of December witnessed important decisions from central banks in Europe and overseas. Following its governing council meeting on 8 December, the European Central Bank (ECB) decided to extend its quantitative easing (QE) programme by 9-months, to the end of 2017, or beyond if necessary, until it sees a sustainable increase in Eurozone inflation towards the ‘below 2%’ target level


  • Returns from the MSCI Asia Pacific ex Japan Index in December were largely flat in sterling terms, although there was a notable divergence in performance between the region’s equity markets with Australia joining in the broader rally in developed markets, while Hong Kong and China were the notable laggards
  • Most Asian currencies continued to weaken relative to the US dollar with expectations that the US Federal Reserve will raise interest rates further in 2017.
  • Investor sentiment towards China was impacted by an apparent shift in policymakers’ focus from prioritising growth to concentrating on credit risks.
  • Higher commodity prices, particularly for crude oil and iron ore, helped support Australia’s equity market performance, which also benefited from further rotation into financials.
  • It was a quiet end to the year for global emerging equity markets although there was significant dispersion of performance between the regions.
  • The EMEA (Europe, Middle East and Africa) region came out on top with all countries here registering gains for December. The Russian equity market led the advance, drawing support from higher oil and gas prices.
  • Latin American equities treaded water for most of the month with most countries here trading flat, except Colombia which got a boost from an interest rate cut.
  • For the second consecutive month, the Russian equity market advanced strongly with the energy sector benefiting from the commitment of global oil producers to cut supply. Sentiment towards Russia was also enhanced by a belief that relations between the country and the US are set to improve in 2017 following Trump’s presidential election victory.
  • Russia’s inflation rate continued its downward trend in December with the annual CPI rate falling to 5.8%. While not enough to trigger any change in monetary policy, Russia’s central bank said it would consider an opportunity to cut interest rates during the first half of 2017.


  • The Japanese equity market ended the month higher in local currency terms. The market has rallied due to a better outlook for global growth in 2017 combined with yen weakness versus the US dollar post the US election
  • Macroeconomic data releases were generally positive over the month. The Bank of Japan upgraded its economic outlook stating that the economy has continued a moderate recovery trend, and maintained all components of its monetary policy.


  • The 10-year Gilt yield fell 18 basis points (bps) to end the year at 1.24%. US government bond yields were higher following the hike in US interest rates, however, the pace of the increase was more modest than recent months with the yield of the 10 year US Treasury rising 6bps to 2.44%. Given the more benign government bond market, corporate bonds outperformed.
  • Deutsche Bank announced it had agreed a US$7.2bn settlement with the Department of Justice. This is significantly below the US$14bn figure initially proposed in the summer and the market reaction to the news was positive.

What do we think?

Talk of the UK Government’s stance to not join the Single Market has weakened the pound further in recent weeks, leading to a continuation in the increase in the value of the overseas assets in portfolios and the earnings expectations of UK companies with overseas earnings.

The prospect of a protectionist Trump presidency and actions to spend their way to economic growth have led to a swing in investor sentiment towards those companies that will benefit from the US finally entering a period of strong economic growth.

This has been a bizarre bull run in investments since the October 2008 Credit Crunch, as price rises have been focussed on safe and secure investments, while the riskier investments that often trigger the exuberance at the end of an investment cycle have largely been ignored. The movement towards those stocks has seen some of the reliable heavyweight fund managers underperform of late with their riskier counterparts finally being rewarded. That this rotation into these stocks has been due to the promises of The Donald should give us all good reason to tread carefully.

Date of next meeting:      21st February 2017

By Mark Fletcher 22 Dec, 2016
What we are pretty confident about is that equity and bond markets are likely to be volatile in 2017 ahead of the negotiations between our Government and the EU and the myriad of other political and social issues that continue to dominate news headlines. It may be another year for investors to hold their nerve and let the storm pass.  
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