Pension Sharing and SIPPs: divorcing like it’s 1999
8 December 2020
A pension sharing order creates a clean break between divorcing parties, but there are times when it struggles with modern SIPPs, says Martin Jones, technical team leader at AJ Bell.
It’s been two decades since pension sharing orders were introduced, and a lot has happened in pensions in that time.
However, the rules around pension sharing orders have remained largely unchanged.
In that same time frame, the size of the SIPP market has multiplied several times over, and SIPPs have gone from niche products for high-net-worth clients to mainstream solutions with wide appeal.
This means we are now at a point where advisers are having to deal with decades-old divorce legislation in the context of modern SIPPs, and there are times when the two prove to be an awkward combination.
Here are three problem areas we’ve looked at and what you might do about them.
If you’re advising a former spouse who is due to receive a pension credit, one of the first and most obvious questions you might ask is how much they’re due to receive.
The member is required to disclose a valuation to the courts at the beginning of the divorce process. Historically, that initial valuation would’ve been a reasonable indicator of current valuation.
In a SIPP, however, a member could hold a broad range of investments or they could hold just one single shareholding, which means the current valuation could be quite different from the initial one. (This is an issue known as ‘moving target syndrome’.)
What’s often frustrating for advisers is that there are no statutory provisions under which a former spouse can obtain an up-to-date valuation, and providers might be unwilling to disclose it to a party they have no contract with given general data protection law.
Unfortunately there’s no technical way around this outside of obtaining consent from the member to disclose the current valuation.
The former spouse might try asking the member direct (depending on whether they’re on good terms) or as adviser you might be able to persuade the pension provider to ask the member for consent. It’s certainly always worth a try.
Transferring in specie
A question that crops up frequently is whether a pension sharing order can be settled by transferring some of the SIPP’s assets rather than cash.
Transfers in specie are commonplace in the SIPP market today, but they can be difficult to reconcile with the pension sharing process.
This is because the process centres on the calculation of a monetary value (based on the percentage in the pension sharing annex). The pension scheme then has to give effect to a transfer of this value to a scheme belonging to the former spouse.
If you have SIPP assets that are changing on a daily basis, as is often the case, the provider may be concerned they’ll struggle to demonstrate they’ve transferred the right amount.
There is technically a small risk HMRC might view it as an unauthorised payment if too much or too little is transferred.
Probably the larger risk is that it leaves the provider open to challenge by either party if they perceive the transfer hasn’t been processed correctly, so they might not allow it. Therefore, it may be sensible to plan on a cash transfer.
Refusing to play ball
In a DIY SIPP, the member buys and sells all the investments, and we have seen cases where members try to frustrate the pension sharing process by not disinvesting sufficient cash to make the transfer.
Less likely but still plausible, it could be the adviser on an advised SIPP who is the intransigent one.
Here it’s worth noting that the legislation imposes a four-month implementation period in which the former spouse’s share must be transferred to their pension.
More importantly, we also know that the Pensions Ombudsman does not look favourably on providers who drag their feet, and we have seen cases where providers have been sanctioned for unreasonable delays despite completing the transfer within four months.
Therefore, it may be a case of politely reminding the provider about this and asking them to disinvest funds themselves, even if it’s something they might feel squeamish about.
It gets more complicated where the member is also a trustee of their SIPP. (This issue also applies to SSASs.) This could result in a situation where the provider is keen to process the pension sharing order as soon as possible, but the member in their role as trustee is refusing to cooperate, bringing the process to a halt.
Short of complex legal action, the only solution might be to make a formal complaint and take it to the Pensions Ombudsman. Its decisions are legally binding and can be enforced through the courts if needs be.
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