Q. I am a higher rate tax payer. I make significant monthly contributions to my personal pension, upon which I receive tax relief at my marginal rate. I caught sight of a newspaper headline recently which appeared to suggest that the government is set to restrict pensions tax relief to the basic rate of income tax for all taxpayers (regardless of the rate at which they pay tax). Is this correct as, if so, this will make it considerably less attractive for me to save for my retirement?
A. No. It has been rumoured for some time that the Chancellor, George Osborne, might reduce the rate of tax relief available in respect of pension contributions, as part of his efforts to curb government spending and to reduce the deficit. However, no such steps have been taken to date.
I suspect that the headline you saw related to a recent report by the Pensions Policy Institute (“PPI”), an independent think-tank, which called for a flat rate of tax relief on pension contributions. The PPI argued that the current tax relief system, which costs the government £35 billion per year, does little, if anything, to encourage pension savings. The PPI suggested that the current system fails especially those workers with low and middle incomes (the very group whom the government is targeting with its “auto enrolment” initiative).
The PPI has suggested that a single, flat-rate, tax relief system would better encourage low and middle income earners to make sufficient pension savings (as it would provide a greater incentive to basic rate taxpayers). It has suggested also that all tax relief should be administered by the pension provider (at present, only basic rate tax relief is reclaimed by the pension provider and paid into the relevant pension – a higher or additional rate taxpayer has to claim tax relief, beyond the basic rate, via his self assessment tax return).
Q. I am in the process of getting divorced. My wife and I have little, if any, savings and our only significant asset is our home (which is mortgage free). We had agreed that our savings and house sale proceeds would be split 50:50; however, I received a letter recently which purported to claim half of my pension also. I am a member of the Local Government Pension Scheme. Is my wife able to claim half of my pension?
A. First, I have too little information to provide you with a definitive answer.
Whether or not your wife is successful in claiming an entitlement to a proportion of your retirement savings will depend upon a number of factors. For example, a court might consider the amount (if any) of your wife’s retirement savings, the amount of income you require/expect in retirement, your respective ages, your ability to make up any reduction in pensions savings (in the event that your current provision is shared with your wife), the extent to which your pension was accrued pre-marriage and the entirety of any financial settlement that you reach.
In short, there are very few rules about what can and cannot be taken account of when seeking to reach a divorce settlement. It is a negotiation and a court will consider what is fair to both parties. If you are in any doubt as to what a court is (as opposed to you are) likely to deem a fair settlement, I recommend that you seek assistance from a solicitor who specialises in family and matrimonial law.
It is increasingly common for divorcing couples to take account of retirement savings when negotiating a financial settlement upon divorce (especially in cases where either one partner has stayed at home and/or there is negative equity due to the recent decline of property values).
You ought to take care when considering the value of a pension for divorce purposes. Some pensions, particularly defined benefit pension schemes (of which the Local Government Pension Scheme is one) can be considerably more valuable than the information provided by the pension provider would suggest. For example, parties are often provided with what is known as a “CETV” (essentially a monetary value of accrued pension rights) for the purpose of negotiating a divorce settlement. However, if that CETV were used to purchase an annuity from an insurer, it is often the case that such an annuity would be considerably less than the pension promised by the pension scheme.
In the event that you reach a financial settlement that involves sharing your pension with your wife, there are a number of options available to put that into effect. I recommend that you seek advice from a chartered financial planner, who specialises in divorce, in order to ensure that your divorce settlement is structure in the most effective and tax-efficient manner.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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