Can you tell me if my husband is correct when he states that I will need to reduce the offsetting figure during our divorce settlement as he wishes to draw down all his pension at 55 although he will continue to work and he was 53 when we split due to his adultery.
He turned 54 this August. It is reducing my share from £200,000 to £88,000 as he is saying I have to pay his tax at 45 per cent as I wish to retain the family home and he retain his full pension as they equate to the same?
I hope you can explain this to me in simple terms please.
Divorce settlement: My estranged husband wants me to pay a 45% tax bill on his pension withdrawal at age 55
Tanya Jefferies, of This is Money, replies: A financial threat like this is bound to have shaken you and in divorce cases like this, it is vital to seek independent legal advice.
We asked a lawyer to look at your case and in her response below she makes clear that your husband is mistaken and explains the legal situation.
On the pension front, it sounds like your husband intends to take advantage of the option to withdraw your entire retirement fund from the age of 55 if you want, but this is almost never a good idea for a number of reasons.
There is a stiff tax penalty, for a start. Only 25 per cent of a pension can be taken tax free, while the rest is subject to income tax at the 20 per cent, 40 per and 45 per cent rates.
If you take your pension all at once, and your income for that year increases dramatically, this can push you into a much higher tax bracket than normal and trigger an unnecessarily big tax bill.
This is why most people either invest their pensions or buy an annuity, so the income is released more gradually and their tax bill is minimised over the course of retirement.
Your husband could fall into another tax trap too if he plans to take more than a 25 per cent tax free lump sum from his pension and carry on working beyond the age of 55, because he will irreversibly damage his ability to keep saving into a pension scheme at the same rate as before.
It can also make more financial sense to delay taking your fund beyond the age of 55 if you don’t need it immediately, as it has the potential for greater investment growth within a tax-efficient pension.
We don’t know your husband’s motives and his full circumstances, but he may be on a destructive path right now regarding your marital finances.
He will hopefully learn of the pitfalls or seek help from a financial adviser who will explain his best course of action before he turns 55 next summer.
And as far as you are concerned, as the legal expert explains below, the court will ensure your joint assets are divided fairly in the divorce.
Helen Bowns, head of the family team at law firm Shakespeare Martineau, replies: This sounds like a horrible situation to be in and you really do have my sympathy.
Helen Bowns: ‘It would seem like your husband is making a spiteful move here and it’s very understandable that you’re worried’
Going through a divorce can be an extremely stressful and emotional experience, especially when one party attempts to exert financial pressure over the other.
However, you will be heartened to know that the situation you find yourself in is a common one, and maybe thankfully, that your husband is wholly incorrect when he says that your financial share will be reduced from around £200,000 to £88,000.
How are pensions usually divided up in a divorce?
Pension off-setting – which is what appears to be happening in your case – is where the court looks at the total value of the pensions involved and decides that the person without the significant pensions (in this case, yourself) should receive a balancing payment in capital funds from another source, for example, the family home.
This is a much less common approach taken in divorces compared with pension sharing, where the pension funds are immediately split between the two parties.
In a pension off-setting scenario – like the one you find yourself in – the court will make a reduction in the funds, once everything has been valued, as you will be receiving the funds immediately and he will have to wait a little bit to receive his.
However, as you are certainly not liable for your husband’s tax bill, this will be nowhere near the £112,000 reduction which he is suggesting.
What will happen to the family home?
It will be very unlikely that you are going to lose the family home.
The courts will be taking a holistic view of both the finances involved and your individual circumstances, and further allocations will be made to cater for your future need.
This is an overriding principle in any matrimonial dispute and as many areas such as income and housing will be taken into account, you may find yourself in the situation where you are entitled not only to the house, but also to further financial support.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
What action should you take now?
It would seem like your husband is making a spiteful move here and it’s very understandable that you’re worried, given that he has provided you with incorrect information.
If you don’t have a lawyer already, you should consult one as soon as possible so you have a professional on your side who can help you deal with your husband.
And if possible, the best course of action would be to seek help from a pensions expert, who can dig through the figures and give you a more accurate assessment of the finances as a whole.
Your lawyer might be able to recommend one, or you could approach a financial adviser who has experience in assessing pensions in divorce cases.
It may be a minor point, but your husband may also wish to seek independent financial advice, as drawing down all of his pension at 55 may not be the most tax-efficient route, triggering a 45 per cent tax bill.
Exploring mediation options could also be a good option for the both of you, depending on whether you’re both able to agree on this course of action.
If arguments over the pensions are ongoing, you could jointly instruct a pension expert to explain both scenarios – pension off-setting and pension sharing – and demonstrate each of the possible outcomes.
However, I understand that your circumstances may not allow for this collaborative approach.
In any case, please do not worry. This is clearly a power move from your husband who is either purposely misleading you or doesn’t understand the full situation entirely himself.
When allocating your capital assets during the divorce process, the courts will not make you shoulder the burden of your husband’s tax bill and they almost certainly won’t force the sale of the family home, if you are unable to buy an alternate property to satisfy your housing needs.
Seek advice from a pensions expert or your lawyer if you want to put your mind at ease, but otherwise you can be safe in the knowledge that the courts will ensure that your future needs are suitably catered for.