Pension Sharing in a divorce where a SSAS is involved can be a ‘challenge’, says Martin Jones, technical team leader at AJ Bell. He highlights areas where paraplanners can add value for the client.
Pension sharing in a SIPP is not without pitfalls, but is relatively straightforward in most cases given there is only one member in the scheme and the provider will take care of most of the process.
Pension sharing in a SSAS, however, can bring more challenges, especially as there will be multiple member-trustees to consider, possibly including the former spouse, many of whom may not have a background in financial services.
It’s possible too that there might not be a professional trustee or administrator, and even experienced trustees are likely to need assistance throughout the process. Here I pick out a few areas where an adviser or paraplanner can really add value.
First of all, and even before the divorce has been finalised, the trustees will need to check the scheme rules to see whether they allow an ex-spouse to receive their pension credit (i.e. their share following the divorce) within the SSAS or whether they need to transfer it to a separate pension scheme
Even if the scheme rules do allow internal transfers, the trustees will need to consider whether they want to bring on board a member’s ex-spouse who most likely doesn’t have any connection to the sponsoring employer. In the majority of cases I suspect they won’t. If so, they will need to make sure they communicate this to the ex-spouse.
There is then a four-month implementation period in which to settle the PSO. This cannot start until the order has legally come into effect and the ex-spouse has specified the destination pension scheme.
With a SIPP this would likely be confirmed in transfer discharge paperwork. In a SSAS, this might be confirmed more informally, but it’s important that the trustees communicate the start of the implementation period to the ex-spouse. This is a legislative requirement plus it means everyone is on the same page.
In order to calculate the pension credit, the trustees will need to get a valuation for all scheme assets and run an up-to-date fund split for the scheme. They must then apply the percentage in the court order (usually found in the annex) to the value of the member’s share. (Rules can be different in Scotland.)
Once the trustees have calculated the value of the pension credit, it’s set in stone. The scheme then has to make a transfer of that value, whether it’s internal or external, and regardless of what happens to the scheme value thereafter.
In terms of valuation dates, legislation allows the trustees to use any day within the four-month Implementation Period, so there is some flexibility.
However, I’ve seen SSAS cases where this has become a point of contention, generally because of fluctuating asset values or large rent payments. To avoid accusations of cherry picking, the trustees might be advised simply to use the first day of the implementation period.
It’s also worth considering the practicalities of obtaining valuations. For assets like cash deposits and investment accounts, this will be straightforward. For commercial property, it’s likely to require formal reports from a qualified expert.
Sometimes trustees are unwilling to obtain reports, not least because the scheme has to foot the bill, but it demonstrates transparency and is a defence against potential claims further down the line.
When the pension sharing legislation was written in 1999, the vast majority of transfers went through as cash, and that’s still the quickest, easiest and most straightforward way for pension scheme trustees to discharge their liability under a PSO. This applies to SSASs as much as it applies to SIPPs.
We also know from Pensions Ombudsman decisions that if there’s cash available the trustees are expected to use that cash.
If there’s insufficient cash, the trustees must look at all available options. These could include making contributions, taking on borrowing or selling investments, possibly something as illiquid as commercial property. There’s no question of not settling the PSO, even if it’s perceived to cause some level of detriment to the scheme.
Another option is settling in-specie. There is nothing in the legislation to say a PSO can’t be processed in-specie. However, there is nothing that says it can or must. Therefore, an ex-spouse cannot require a pension credit to be paid in-specie.
Equally, the trustees cannot require a pension credit to be paid in-specie. They can offer it as an option, but they must understand they haven’t undertaken any suitability process to see what assets are appropriate for the ex-spouse, and they could be saddling a potentially vulnerable individual with an asset that may not be appropriate for their long-term retirement needs. This could leave them open to a claim or complaint further down the line.
For this reason, it should only be considered as an option if the ex-spouse has had the opportunity to review the scheme assets and take regulated advice.
One general point to finish – get out in front of all these issues as early as possible. Settling a PSO in a SSAS is not always straightforward, but good planning and communication will go a long way to making it as smooth as possible.