Pensions are a complex area and you should always consult a specialist family lawyer before entering into an agreement.
Self-Invested Personal Pensions are a popular way to save for retirement and increasingly parties are looking at ways in which to share these investments on divorce or dissolution.
SIPPs, as they are commonly known, offer the same tax-free investing as traditional pension schemes. The key difference is that a SIPP allows you the freedom to choose your own investments and from a much wider range than other pensions. For example, you might choose to invest your SIPP partly in stocks and shares, partly in a trustee investment bond and partly in commercial property.
When it comes to sharing a pension on divorce or civil partnership dissolution, the variety of different investments that can be found in a SIPP can make dividing the pension pot more difficult, and it's important to have consideration to such potential challenges at an early stage.
Whilst valuing the individual components of a SIPP may be relatively straightforward, it is important to have in mind the following considerations
- Pension sharing in England and Wales requires the parties to agree on a percentage transfer out of a pension scheme, and not a fixed sum. Unlike in other jurisdictions (for example Scotland where the value of the pension is determined as at the date of separation) it is not until the Pension Sharing Order ('PSO') is effected that the benefits of the pension are calculated and so the benefits due to the receiving party confirmed.
- The paying party will therefore need to consider at an early stage whether it will be necessary to liquidate some of their positions in the investment portfolio, with a view to having to make a payment to the receiving party.
- A paying party may agree to transfer certain investments as a pension credit in-specie to the receiving party's pension. In those circumstances, it is prudent to consult with the receiving party in advance to agree the investments to be transferred; it may be appropriate, to mitigate against fluctuations in the value of investments, to build in an agreed shortfall in the value of those investments, to be made up by a balancing payment – but remember the balancing payment must be paid using other pension assets.
- In almost all cases, the paying party will want to avoid a situation where the SIPP provider is forced into action to satisfy the PSO. For this reason, it is always preferable to agree how the PSO will be satisfied before an order is made. Where a SIPP holds commercial property, for example, consideration should be given as to whether the liquid assets are sufficient to meet the PSO and, if not, whether the SIPP can raise the capital to meet the PSO.
- Where a SIPP holds commercial property that is unencumbered, the paying party might consider taking out a mortgage to generate the liquidity the SIPP needs to satisfy the PSO. If that is not possible, it may be necessary to sell the property, in which case thought will need to be given as to how this will be managed and any agreement recorded within the Final Financial Order.
- It is possible, where there is agreement between the parties, for the receiving party to receive a percentage ownership of a property within a SIPP. This is referred to as a 'group arrangement'. Any income derived from the property will then be paid into the group arrangement before being paid to the individual SIPPs on the same percentage ownership split. Such an arrangement will not achieve a clean break, and it is very likely that there will be instances later on when the parties are required to agree on certain matters relating to the property, for example agreeing the terms of any new tenancy, or if one of them wishes to sell. For this reason, a group arrangement is unlikely to be appropriate in most cases.
- Don't forget you can offset. However, bear in mind the guidance issued by the Pension Advisory Group in their Report: "Mixing categories of assets runs the risk of unfairness in that valuations issues may become very difficult and, absent agreement, it may be unfair to burden one party with non-realisable assets."
Pensions are a complex area and you should always consult a specialist family lawyer before entering into an agreement to share part of your pension.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.