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Divorce and the abolition of Lifetime Allowance

Yesterday, Jeremy Hunt’s Spring Budget included the abolition of the pension Lifetime Allowance (LTA), which will apply to all members of registered pension schemes following it’s introduction on 6th April 2023.

Here, Stowe Partner, Liverpool-based Matthew Taylor, looks at the implications for divorce financial settlements.

How Pension Lifetime Allowance changes impact Divorce

The abolition of the Lifetime Allowance (LTA) announced in the UK’s Spring Budget, may have a drastic impact on financial negotiations following divorce for anyone who previously would have been hit by the LTA due to holding a pension fund valued at over £1.07m.

In situations where a couple has agreed to have a pension sharing order made in respect of such a fund following a divorce, the percentage of the fund to be shared may now need to be recalculated to reflect the increased net value of the fund.

This may also be problematic, where a large pension fund is not to be shared, but instead the non-pension holder is to retain a greater proportion of other assets to ‘offset’ the pension wealth retained by the holder. 

The value of the retained pension has now dramatically increased, given the reduction in tax to be paid on receipt of funds – whether as income or lump sum – or following a crystallising event, such as transferring the fund overseas or reaching age 75 with unused pension benefits. 

Failure to recalculate the value of the fund without accounting for the LTA could see non-pension holders lose out.

An unintended impact of the abolition of the LTA may be to make high net worth pension negotiations more complex.

Whereas previously, pension sharing could be an attractive settlement route, as it could minimise or eliminate tax paid due to the LTA, that advantage no longer applies, which may lead to more arguments about whether pensions should be shared or not.

Given the scope of these changes, it is vital that parties – particularly the non-pension holding spouse – take legal and financial advice before finalising any settlement.

Useful Links

Do you split a pension when divorcing?

Divorce & the Gender Pension Gap

Matthew is a Senior Associate and was noted in the Legal 500 for being ‘excellent’ and thinking ‘through cases very carefully to make very sound tactical decisions.’ His specialism is resolving financial issues following a divorce or separation and he frequently advises clients on cohabitation issues. He is based at our Liverpool office.

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