Pensions, tax and trust issues on divorce /dissolution of civil partnership

Pensions

When assessing the assets available for division between a couple on divorce/dissolution of civil partnership the Court will also take into account the parties pensions. As with the other assets the Court will want to achieve a fair settlement between the parties and often there will be a disparity in the pension provision of the parties typically because a wife is likely to have interrupted her contributions if she stopped work to have children or may even not have any pension provision at all.

The Courts have the power to make the following orders in respect of pensions:

Pension Sharing – division of the pension fund between the parties in percentage terms- it has only been available since 1 December 2000;

Earmarking/Attachment – the pension trustees are ordered to administer the fund in a particular way i.e. paying the income to a named person or a lump sum on maturity. This is a less popular option following the arrival of 1 above.

The Courts can also order the party with more money or greater pension provision to pay maintenance past retirement but this is against the clean break principle which the Court is required to consider and encourage wherever possible. The Court can also offset, i.e. by giving the party without or with less pension provision assets now to compensate which can be used to make provision for retirement. This is however only going to be possible in cases where there are sufficient assets over and above the parties' needs which can be easily divided and therefore generally this is done in cases where the parties reach agreement about settlement.

Pensions are treated differently to other assets because they are not owned by the party in whose name the fund is or easily accessible. As a result it cannot be (even if in payment) equated with cash or other liquid assets. This therefore has to be taken into account in any settlement.

Expert advice is often required in respect of pensions, not only in valuing them but also in respect of the impact of A-Day (Government change to pension regulations from 6 April 2006) on the division of assets and the pension benefits that will ultimately be received. 

Tax

In any financial settlement tax is an important and often essential consideration as assets may need to be transferred, disposed of or dealt with by way of Will.

Our Private Client Group can advise in detail in respect of any tax issues or tax consequences that may arise.

Trusts

Trusts have become much more commonplace over the years as people have become more creative and sophisticated with their estate and tax planning although this has been somewhat affected by the advent of the Finance Act 2006.

Although trusts are often set up pre marriage (or even the relationship) and with inherited assets this does not preclude these assets from being taken into account and also included within financial settlements. The English Courts have very wide discretion in respect of trusts if they are found to be "nuptial". The Court can change the Trustees or at the other extreme break open the trust to make payment outright payments to non-beneficiaries.

Nuptiality of a trust will depend on the facts of the case and the background to the setting up of the trust but by way of guidance if the parties are beneficiaries or it was set up in contemplation of the marriage it is likely to be nuptial. If the trust contains the matrimonial home then it will almost definitely be nuptial. Generally the Court will try and avoid dealing with trusts where there are other assets that can be called upon but even if the trust is not nuptial the Court can use judicious encouragement if the funds are not available from elsewhere. For example a husband could be ordered to pay his wife a lump sum or maintenance over and above what he can afford on the basis that the Court believe on the facts that the Trustees will assist him to meet that obligation from trust funds. The Courts do however have to be careful not to stray into improper pressure when making such orders. Clearly the enforceability of an order against a trust does depend upon the jurisdiction to which the trust is subject and any reciprocal enforcement provisions.

It is therefore very important where trusts are involved to review the position as early as possible to decide how best to proceed.