Read this before taking your 25% tax-free lump sum

With speculation swirling about the Labour government’s first Budget, it is unsurprising that rumoured cuts to pension taxation are causing concern amongst savers. Currently, it is being speculated that Labour will reduce the maximum tax-free lump sum amount to just £100,000, down from the current £268,275.

In our Family Law team, we have noticed a definite increase in the number of high-net-worth divorcing couples where partners are taking their 25% tax-free lump sum ahead of the Budget rather than waiting to see what the government will do. This is having a significant impact on pension sharing reports, which are having to be updated following any drawdowns at an additional cost.  

The financial impact

If you take and spend your tax-free cash to avoid it going into the divorce settlement, it may result in a claim to restore funds to the matrimonial pot. This is because doing so could substantially affect your own pension income, as well as your former spouse’s. Particularly if they do not have significant pension provision of their own, it could seriously impact their ability to live independently later in life.

With less money in the pot, it may also mean that you may have to share other assets as well, including your home, to make up the shortfall. This could result in the property having to be sold (for instance, if pension funds are no longer available to be applied to reduce any outstanding mortgage to a level low enough to enable one spouse to take over the outstanding borrowing in his or her sole name).

The importance of taking advice

It must be stressed that the rumours surrounding the October Budget are just that at present – rumours. We don’t know what is going to happen; the speculation may not be accurate and acting hastily may seriously impact your retirement outcomes.

We strongly advise you to take legal advice before acting to understand the impact of these kinds of decisions on your divorce settlement and any pension sharing order. We would also recommend that you seek professional financial advice before deciding to draw down from your pension.  

At Attwaters Jameson Hill, we specialise in private wealth matters and work with many Family Law clients who have substantial pension assets upon divorce. To speak with us about your situation, please do contact the Family Law team at Attwaters Jameson Hill on 0330 221 8855 or email enquiries@attwaters.co.uk