lumin news Issue 8 / Summer 2023

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Page 6 lumin news 8 / summer 2023 Divorce: Ways to share pension assets and ensure fair outcomes Advice from a professional can help ease the burden when dividing pensions during a divorce. SIMON RICCA Pensions on Divorce Expert simon.ricca@luminpensions.co.uk Phone 02039 887 788 Divorces can be a stressful and complicated time for both parties, but seeking financial advice on your pension options can help you save money, streamline the process, and reduce some of the worry. Pension assets in a divorce According to the Matrimonial Causes Act 1973, the value of both parties’ private pensions form part of the overall distribution of assets when a couple go through a divorce. This typically includes all your private pensions, not just assets built up during marriage. State Pensions can’t usually be shared. Splitting pension assets When dividing the pension pots of the respective parties, pension sharing is often the go-to option. A percentage share of one person’s pension(s) is transferred to the other, in order to equalise assets. This is often a favoured option as it provides a clean break between the parties. Another less common method is known as offsetting. This sees the receiving party take less of a percentage pension share in favour of non-pension assets, such as cash or property. Offsetting can be an attractive proposition if one party requires an immediate cash injection. However, appropriate liquidity is required. Pension sharing options in a divorce Option Description Use Defined benefit pensions A defined benefit pension plan has benefits built up over time depending on your salary and years of service as an employee. A cash equivalent transfer value is used to assess the cash value of the plan’s benefits at divorce. A cash equivalent transfer value quote will often not be an accurate reflection of the plan’s true value. It can be as much as 50% below ‘fair value’, or the true cost of replacing the pension benefits in the open market. If one party has a defined benefit pension it is important to seek a pension sharing report from a qualified financial adviser. A report will provide a detailed breakdown of your options, with the aim of ensuring equality of income in retirement for both parties. Hidden complications and pitfalls There are sometimes a number of other hidden complications. For example, older pension schemes can contain certain options, such as guaranteed annuity rates offered by an insurance company. This could mean that your pension is actually more valuable than the cash equivalent transfer value quoted by the pension company. Significant age differences and serious medical conditions can complicate the picture. A pension sharing report will summarise such issues and outline the available options. Planning for the future Once a decision has been reached on the division of pension assets, a financial adviser can help to arrange a pension transfer. They can also provide ongoing financial planning advice. For example, a long-term cashflow forecast will analyse expenditure and lifestyle, allowing you to effectively plan and budget for your new way of life. A financial adviser can also outline investment opportunities if you have received a cash lump sum as part of the division of assets. A pension sharing report from an expert can allow you to understand and assess your options during a divorce. Lumin Wealth’s sister firm, Lumin Pension Services, provides simple and streamlined pension sharing reports that are produced much faster than the industry average. Please call 03300 564 446 to find out more. Pension sharing Offsetting Earmarking / attachment Pension rights are irrevocably shared at the time of divorce Lump sum value of pension is offset against other non-pension assets, such as cash or property One party will receive a proportion of their ex-spouse’s pension when it starts being paid in retirement Widely used due to immediate settlement and clean break Less common as it requires liquidity outside of pension and property assets Rarely used due to lack of a clean break, uncertain timings, and potential tax disadvantages FACTSHEET Pension options in a divorce Request a free factsheet via enclosed response card, info@luminwealth.co.uk or call Lumin Pension Services on 03300 564 446
lumin news 8 / summer 2023 Page 7 How thorough due diligence on tax-efficient solutions creates added value Venture capital trusts and enterprise investment schemes can form a valuable part of a long-term and tax-efficient investment strategy – but effective due diligence is vital. With dividend and capital gains allowances having been cut from April 2023, private investors may increasingly seek out less traditional investment opportunities. Both venture capital trusts (VCTs) and enterprise investment schemes (EISs) provide an opportunity to diversify an investment strategy, while at the same time reducing your tax liability. But they are complex, high-risk investments, and there are also a large number to choose from. How, then, can you find the right option to match your specific needs? The importance of due diligence Extensive and effective due diligence is the key to selecting suitable EIS and VCT solutions that cater to longterm investors. At a financial advice firm with discretionary fund management permissions this typically consists of a panel or committee, made up of financial advisers, senior managers and members of the investment team, who will implement a rigorous and multi-layered due diligence process. Extensive initial screening processes seek to establish fund details, including subscription amounts, target returns /dividends, confirmation of a fair and transparent fee structure, and the history of assets under management. Additional screening stages can score funds on metrics including liquidity, performance and the investment strategy in order to establish their suitability. An in-depth qualitative and quantitative rating system is used to score individual fund propositions. Factors including the long-term track record and experience of the fund managers, the longevity of the proposition, and exit strategy are scrutinised. The strength of the brand recognition (to attract top-tier companies and investors) is another factor a robust due diligence process would incorporate. Choosing the right financial planning partner It’s important to choose the right financial advice partner with a strong due diligence process, as not all VCTs and EISs are created equal, and not all client outcomes are positive. Lumin’s Client Solutions Committee – which is made up of senior management, senior financial advisers, members of the investment team, and compliance experts – has conducted extensive due diligence to select our VCT and EIS product solutions partners. To find out more, call 03300 564 446. FACTSHEET Tax-efficient solutions for wealthy individuals Request a free factsheet via enclosed response card, info@luminwealth.co.uk or call the Lumin team on 03300 564 446 Offshore bonds vs. general investment accounts Many higher earners who use up annual pension and ISA allowances turn to general investment accounts, which offer flexibility and easy access. However, general investment accounts are subject to income or capital gains tax. Recent cuts to tax allowances mean offshore bonds may provide greater tax advantages for long-term investors. Tax shelter for investors The tax-free allowances for capital gains and dividends have been halved to £6,000 and £1,000 for the 2023/24 tax year, and both allowances will be cut in half again from 2024 /25. As a result, offshore bonds – investments held within a single-premium life insurance policy – could be more tax- efficient than general investment accounts for certain investors. Investment growth is added, or rolled up, in an offshore bond with tax deferred into the future. You only pay income tax on the gain when you encash the bond and on the difference to the original investment value. This can be a useful planning tool if you will be a lower rate taxpayer at the time of encashment. Investors can also benefit from ‘top slice relief ’, which allows you to divide the chargeable gain by the number of years it has been active to remain within basic /higher rate tax bands. Inheritance tax (IHT) advantages Many offshore investment bonds consist of segments that can be assigned to beneficiaries without incurring an immediate tax liability. After seven years the assignment is considered outside of the estate for IHT purposes. If the beneficiary is a lower rate taxpayer at the time of encashment, it would be another advantage. Which tax wrappers or investment solutions are right for you? As an independent IFA, Lumin has access to a range of products and solutions. Call 03300 564 446 to learn more.
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lumin news Issue 8 / Summer 2023

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