In his Spring Budget 2023, the Chancellor Jeremy Hunt announced unexpected changes to pension tax. These are intended to reduce the impact of strict pension rules which, Mr Hunt believes, have negatively impacted the UK labour market. The changes could, in cases where the lifetime allowance was a live factor, require an up to date pension report for divorce purposes – provided one is still able to obtain one.
Abolishing the lifetime allowance
This is a significant change for divorce lawyers to consider with their clients.
The lifetime allowance (LTA) is the maximum amount of saving an individual can make in a registered pension scheme without incurring a tax charge. For the 2022/23 tax year, the standard LTA was set at £1,073,100.
From 6 April 2023, the LTA is now removed, and from April 2024 it will be completely abolished. Consequently, one will be able to contribute as much as they like into their pension schemes, and benefit from government tax relief, without being penalised for exceeding the LTA level. This of course applies to cases where pensions are of significant value and will result in pensions being of considerable value in the future.
This abolition could drastically impact financial negotiations taking place in cases where a pension fund is valued at over £1.07m. Where a couple has agreed to have a pension share in respect of such a fund, the percentage of the fund to be shared may need to be recalculated to reflect the increased value of the fund. Failure to recalculate a fund’s value without the LTA could significantly disadvantage the non-pension holder and cause them to lose out.
Tax-free lump sum
Under the previous pension tax rules, an individual could withdraw up to 25% of their pension savings as a tax-free lump sum. Despite abolishing the LTA, the tax-free lump sum that can be drawn at age 55 is now capped at £268,275 and by 2024, once the LTA is fully abolished, it is envisaged that there will be another cap set.
LTA change – a Barder event?
What is a Barder event? A Barder event is an event, very soon after a court has made a final decision. The event is unforeseen and unforeseeable at the time the order is made, which invalidates the basis on which the order was made.
Recently, the impact of the coronavirus pandemic and whether it could amount to a Barder event (HW v WW ) or not (BT v CU ) has been a feature of reported caselaw. The application to set aside an order following a Barder event, should be made in good time following the event giving rise to the application.
The changes benefit wealthier individuals and could see the value of pension funds increase significantly. For cases which have recently settled, we would expect, as lawyers, that arguments might be raised as to whether a Barder event has occurred. Time will tell if such a case is reported.
Having practised during the financial crisis and recent pandemic – how likely the family court will allow such an argument to succeed and open the ‘flood gates’ to further litigation seems unlikely…but to be (happily) proved wrong would lead to some very interesting work and for the non-pension holder, a sense of justice no doubt.
Rayden Solicitors are experts when it comes to the tax and financial implications of divorce, please do not hesitate to contact us to discuss your situation in confidence.