Pensions savings could be slashed by nearly £700,000 as part of an inheritance tax raid from the new Labour Party government and HMRC too. Divorced couples could face tax bills of nearly £700,000 on their pension savings from 2027.
The warning comes as inherited pension pots will become subject to inheritance tax (IHT) for the first time. Dean Butler, the managing director for Retail Direct at Standard Life, warns full exemptions for the post-2027 rules are not yet clear.
But he said: “It seems reasonable to assume pensions inherited by former partners will be subject to IHT”. He said: “With early January typically seeing a sharp rise in divorce enquiries, for some the notorious post-festive period will be particularly stressful.”
READ MORE Blue Badge holders face £1,000 fine under plan to ‘tackle’ trend
Discussing pension sharing, he said: “This is when all or a percentage of one person’s pensions is transferred to the other. Like pension offsetting, a big advantage is the clean break – once person A’s pension is transferred across, it’s in person B’s full control. On the downside, it can be quite complicated to set up and needs an order from the court.”
Mr Butler also discussed pension attachment orders, adding: “This is when one person agrees to pay a portion of their pension income to the other when, and only when, it starts being paid – also known as pension earmarking in Scotland. This might make things a bit simpler at the time of divorce itself, but it also requires a court order and the first person retains quite a lot of control of when and how the pension is used, and payments will stop when they die.”
On offsetting, he explained: “This is when the value of pensions is ‘offset’ against other assets. For example, one person might get a bigger share of the home and keep their pension, or keep other savings instead. This offers a clean break and doesn’t need a court order, but could lead to one person having little to live on in retirement.
“The decision is also based on the value of the pension today, so it will involve one person giving up their entitlement to future investment growth.” He added: “Across the UK, there are three ways to resolve the question of pensions during divorce. These are known as Pensions offsetting, Pensions sharing and Pension attachment or earmarking orders. Each have their pros and cons.”