SIPPs and divorce – what you and your clients need to know
It has been well documented over recent years that divorce rates in the UK are rising. The BBC reports that the number of divorces in the England and Wales increased by almost a fifth between 2019 and 2020 to more than 100,000.
A breakup of any longstanding relationship can be emotionally difficult, and there are often many practical factors couples will need to attend to that can add to the stress.
Often these will revolve around any joint assets a couple may have and how the couple will share them. Couples will need to consider property, savings, and investments and they will often turn to their financial adviser to assist with the practicalities of splitting these assets.
Pensions are not always an asset first considered in these circumstances, despite often being considerable in size. Indeed, the Times recently reported that fewer than 1 in 7 divorcing couples split their pension savings.
There are several different ways that separating couples can split pension assets depending on the type of benefits that they hold.
While pension earmarking and offsetting are two options separating clients can consider, when it comes to SIPPs pensions are normally split using a Pension Sharing Order (PSO). This is a court order that sets out in percentage terms how much of a pension will be granted to an ex-spouse. The ex-spouse receives this as a pension credit.
Most advisers are familiar with PSOs and the principle of them. However, we often find that, when it comes to advising a client through a divorce and a PSO, the steps that advisers and clients need to navigate are a little less clear.
In this article, you can see some case studies that highlight how a PSO can work in practice. Here, read about some of the points you’ll need to consider, and some questions that you can ask clients to help manage the process as smoothly and sensitively as possible.
The first steps
In most instances, advisers will be aware of their client’s plan to a divorce and will be able to formulate a plan as to how to proceed.
However, it is not unusual for IPM to hear from either the client’s or the ex-spouse’s solicitor in the first instance with a copy of the PSO! If this is the case, we will let the adviser know.
As mentioned above, the PSO sets out a percentage of the pension assets that are to be split and the name of the scheme which the split relates to. So, we would expect to see the IPM SIPP named in the PSO.
How the assets will be split is normally determined by a discussion we will have with the adviser acting for the client(s) (more on this shortly), unless a “court consent form” has been supplied that specifies any particular assets that have been awarded to each client.
It is important to remember that IPM must follow any court order we are supplied with. So, if there is any dispute or discussion as to how the assets are split or what asset goes where, clients should challenge this before the court documents are produced.
The pension administration
Once an adviser has had a chance to consider the percentage split in the PSO there are several practical tasks that an adviser can undertake to help smooth the next steps for both parties.
Consider splitting the investments of the pension
If the assets are liquid holdings, then selling sufficient to meet the PSO should be straightforward. However, consideration will need to be given as to how a SIPP with a large asset can be split, such as a commercial property. Read this article to see how this could work in practice.
Where will the benefits for the ex-spouse be paid to?
Will they set up an arrangement with the existing provider, or will they be going elsewhere?
Whatever the decision, having the new pension set up and ready to receive the pension credit in good time will help the process complete quickly.
For us, where benefits are being paid away from IPM, we will issue discharge forms, which will need to be completed by the ex-spouse, and the receiving arrangement.
Anti-money laundering checks will be needed
As the administrator paying out the pension credit, IPM will want to conduct anti-money laundering checks on the ex-spouse to ensure the credit is being paid in line with the PSO.
Consequently, providing IPM with two identity documents certified by the adviser early in the process will help.
Note that IPM has four months from the point where we have all the information required to make the pension credit to complete the PSO.
While this should not be an issue in most instances, consideration should be given where a property is held within a SIPP. IPM will need to value the SIPP to determine the value of the pension credit. If a property is held, then a valuation from a RICS surveyor will be required to ascertain this.
On occasion, the assets in the client’s SIPP can determine where the pension credit will be paid – such as where a commercial property is involved. See these case studies to see examples of PSOs are dealt with in certain situations.
It is not unusual to see the ex-spouse appoint a new financial adviser to handle their financial matters, for reasons that are understandable. If this is the case, contacting that adviser to arrange a coordinated response to the PSO is often beneficial for both clients.
Common reasons that slow the payout of a pension credit include:
- When both parties and their intermediaries are not communicating as to where the credit should be paid
- Where the necessary paperwork to establish that arrangement is not in place.
Concluding the PSO
Once IPM has details of where the pension credit should be paid, and it has been ascertained how this will be paid (through the transfer of cash or assets), we will make the necessary arrangements within the SIPP.
This could involve making a disinvestment from an existing portfolio or instructing an investment house to transfer in-specie a percentage of assets held.
At that point the pension split has been completed. IPM will now provide confirmation to the client, the ex-spouse, and the receiving scheme (even if this is IPM!) confirming what we have paid.
There is an important caveat if the client whose SIPP has been split is in drawdown.
Here, while the pension credit is treated as uncrystallised by the ex-spouse’s receiving scheme, it is not possible for a pension commencement lump sum (PCLS) to be paid.
The only option for the ex-spouse is to draw income from these benefits in the future, after undertaking a test against the ex-spouse’s Lifetime Allowance.
Get in touch
If you have clients going through a divorce and they require pension advice, or advice on how to split an IPM SIPP, please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.