Greater access to defined contribution pensions under the new pension reforms could make it easier for divorcing couples to split their assets. For the first time ever, holders of defined contribution pensions will have total freedom to access all of the funds in their pension scheme from the age of 55 onwards. Previously, individuals were only able to access 25% of their pension fund as a tax free lump sum and had to purchase an annuity or an income drawdown plan with the remaining balance.
In practical terms, this means divorcing couples now have greater flexibility in the way in which they divide their matrimonial assets. For example, funds could be withdrawn from the pension to pay to the other party in exchange for other assets or, in cases where the party is younger than the other and would have otherwise been entitled to a pension share, part of the pension fund could be taken as a lump sum so that the younger party would not have to wait until they reached their own retirement age before being able to benefit from his/her share of the pension fund.
Whilst the new pension reforms may have less of an impact for couples in their 20s or 30s who will have to wait years to withdraw cash from their pension funds, the new pension reforms may have a significant impact on how terms of divorce settlements are negotiated for those in their 50s and beyond.
It has to be borne in mind that the different options will have different financial and tax consequences and so, more than ever, it is important that independent financial advice is taken from the outset as to the options available and the advantages and disadvantages of the various options of accessing the parties’ pension savings.