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Many years ago, when I started dabbling in divorce and family, pensions were just something the husband had and kept to himself. No-one even questioned that outcome. That’s just the way it was.

It wasn’t until 1999 that it became possible to properly share pension assets between the divorcing couple. For many couples, this was a game-changer, particularly for those for whom a large pension formed a significant part of their assets – for example, consultants, pilots and senior executives in final salary schemes.

Since then, our approach to pensions has shifted from a sort of contented innocence (after all, no-one understood them) through a somewhat baffled bewilderment (and suspicion about who knew what), and finally to a certain degree of confidence (which might be more or less justified). This is quite something, given the mind-boggling complexity surrounding pensions. In fact, to paraphrase Douglas Adams, pensions are a lot more complicated than you might think, even if you start from a position of thinking they’re pretty damn complicated in the first place.

Luckily in 2019, we got our hands on our very own Hitch-Hiker’s Guide to Pensions, in the form of the report of the Pensions Advisory Group (“PAG”), which was published in 2019.

Although the report was not given quite the reception it would have got if it had dressed itself in a blonde wig and called itself Taylor Swift, it did, for the first time, give practitioners a really clear guide of how to deal with pensions on divorce, including:

• when to get pensions valued by an expert;
• how to instruct an expert; and
• what to expect in larger money cases, where the assets exceed the combined needs of the parties.

The aim of the report was to promote consistency amongst both practitioners and the judiciary, and it’s fair to say that it achieved those aims. As practitioners, we knew that judges would be relying on it, and so we knew we could – and should – rely on it too. We did, and it noticeably reduced the scope for argument about when expert advice would be needed and how the pensions would be likely to be treated by the court.

Of course, divorce lawyers can’t be experts when it comes to pensions. Venturing into the territory of “financial advice” will ring alarm bells with both the Financial Conduct Authority and your insurers. You need a PODE both for assistance and protection. A PODE is a mystical creature (somewhat like a Vogon, but without the bad poetry) created by PAG. An expert in practising the dark arts of an actuary, they may not actually be an actuary, but may be a financial adviser with sufficient expertise such that they meet the criteria for being a “Pensions on Divorce Expert”.

A PODE will advise on:

• how much the pensions are worth, using a consistent and realistic methodology;
• the most efficient way to share them in such a way as to preserve as much pension income as possible;
• how much will need to be shared in order to achieve equality of income in retirement;
• the outcome if the values of the pensions are shared equally;
• the value of the pensions for off-setting purposes; and
• a whole host of other things, including things you didn’t know you didn’t know.

The divorcing couple can then rely on the PODE report in order to agree how their pensions should be shared in the context of the overall settlement (or the judge at the final hearing can decide if the couple can’t agree).

PAG updated its report in December 2023, and that’s when we knew that the first report was only an appetiser – the second is the main event – a tour de force of a report, an absolute barn-stormer of expertise, knowledge, experience, common-sense and wisdom all wrapped up in 177 pages of page-turning professional excellence.

PAG2, as the report is affectionately known, provides updates and further insights based on developments and feedback since 2019. In particular, it:

• confirms that in HNW cases, where pensions form only a modest part of the assets, you don’t need to get the pensions valued by a PODE;
• confirms that it is almost always going to be wrong to discount pension earned prior to the relationship if that pension is needed to meet the other person’s needs in retirement – this, on the face of it does not apply to bigger money cases, but beware the court’s discretion about “needs”, which, as we know, are often interpreted not only generously, but beyond the realms of what most ordinary people would consider necessity;
• considers in detail whether the couple should be seeking equality of income or equality of capital;
• includes the “Galbraith Tables”, an attempt to simplify the valuation of a pension for off-setting purposes; and
• expands its consideration of the endlessly fascinating and ultimately insoluble problem of the income gap.

Importantly, PAG2 also anticipates changes to the taxation of pension investment brought about by the Finance Act 2024 which are of particular relevance to high earners.

Prior to April 2023, there was a limit to how much you could invest over a lifetime into your pension without suffering some pretty punitive taxation consequences – this was the lifetime allowance (LTA). Although the limit fluctuated somewhat wildly, it was finally set at £1,073,100 in 2022/2023. Anything more than this and the taxpayer had to pay a whopping 55% tax when drawing down on the excess.

In his 2023 budget, the Chancellor announced the abolition of the LTA, and this was brought about by the Finance Act 2024. So, with effect from April 2024, there is no upper limit on how much you can save into an approved pension before being bitten savagely on the backside by the tax dog at Number 11.

From April 2024 onwards, you can save as much as you like into your pension, and when you reach retirement, you can take a tax-free lump sum of either 25% of the value of the pension or £268,275, whichever is the lower. You can take more than this if you like, but any excess will be taxed as income.

Of course, it’s never that simple, and there are many caveats to the above, including – most importantly and obviously – the annual cap on contributions, or the “annual allowance”. This is the amount you can invest into your pension each year whilst claiming tax relief on the contributions. Once you exceed the annual allowance, you not only lose the tax relief, but you also incur tax charges.

A few years ago, this made big news, with senior doctors choosing to retire early rather than to keep facing massive tax bills on their excess pension contributions. Other high earners may have faced similar issues but in the private sector there were at least other options open to the employer/employee, such as cash in lieu of pension contributions or membership of non-registered pension schemes. For the NHS, there was no such flexibility, and the doctors were revolting.

In response, the Government increased the annual allowance to £60,000 and that, together with the abolition of the LTA, was enough to soothe the consultants back into their consulting rooms.

But there is a sting in this tail. What the tax man giveth, the tax man taketh away, and the annual allowance is tapered to as little as £10,000 per annum for the highest earners.

There are also transitional arrangements and LTA protections to be considered. These go far beyond the expertise of even a specialist divorce lawyer – you need to consult your tax expert for that.

We should also remember that the current government looks set to be replaced within the next 12 months, and Rachel Reeves, the shadow chancellor, has already said that Labour is committed to reinstating the LTA. That will be relevant to our high-net-worth clients in terms of their retirement planning and on divorce, and our role will be to signpost them to specialist tax and financial advisers.

Whether the LTA is revived or not, we should all be aware of our limitations when it comes to pensions. Real experts spend a lifetime considering the alchemy of tax, trusts and statistics. It is their expertise we must seek when needed and we cannot give financial advice (unless we are regulated to do so). The real trick for us, as divorce lawyers, is to:

• recognise a pension when we see one;
• be cognisant of the limitations imposed by the tax regime;
• know when advice from a PODE is likely to be required;
• understand what we want from the PODE;
• understand the PODE’s advice when it is given; and
• advise our clients as to the approach likely to be adopted by the court.

And the good news for us is that it’s all right there, in PAG2, which should be emblazoned, in large friendly letters with the words, “Don’t Panic”.

If you are going through divorce and would like help and guidance on pension sharing and/or any other financial matters related to divorce, get in touch with one of our experienced Family lawyers who can help guide you through this potential minefield.

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