Divorce: splitting pensions and achieving a clean break

It's another Meaningful Money Q&A, taking in the £100k tax trap, splitting pensions on divorce, safely switching investment platforms and much more!

Shownotes: https://meaningfulmoney.tv/QA38

01:59 Question 1

Hi Roger and Pete,

Long time listener, first time questioner. My wife and I have both earned in excess of £100k for a few years now, meaning I am acquiring a peculiar set of skills on the various ways to use pension contributions, rollover allowances, gift aids, etc to keep us both below the (entirely bananas) £100k cliff-edge each year.

My question is on the £60k pension annual allowance. Does it only apply to the amount of pension savings in a given year which can be made without paying a tax charge, or does it also count as the maximum amount of pension deduction which can be taken to calculate net adjusted income as part of completing our tax returns? The (slightly over-simplified) situation in my mind is that if I earned £160,500 in a given year, I would prefer to pay £61k into a pension, thereby reducing my net adjusted income to £99,500 to stay below the cliff-edge, even if I had to pay 40% tax on the extra £1000 above the pension annual allowance.

As a fun aside, I asked this to my preferred AI - and I leave a link to see if you agree with it's answer or not - https://g.co/gemini/share/8c23e91cb658 Stephen

07:58 Question 2

Hello Pete & Roger

Listen and enjoy all your podcasts regularly but every now and again you get one that addresses specific points to the individual listener. For me it was Podcast QA18. A really great podcast.

1. The 2015 changes to pensions made significant differences to pensions and most financial experts have rightly advised using your pension as one of the best places to put savings. It does seem unfair that you plan your savings and pensions well in advance for retirement based on government rules. and then you you find you are likely to have a sizeable IHT bill. At 78 it is difficult to turn the ship around quickly. Many more people will be affected by this over the next decade.

The main reason however for my question relates to ways to reducing the effects of this IHT change. The general allowances and the 7 year rule are all clear. However the main exemption that could help is the little used Gifts form Excess Income. I have read up as much as I can and the whole system seems rather vague and many things open to interpretation, even by financial experts. There is no clear and precise set of rules whereby you can be certain something is capital or income. Your executor will have to understand all this and have all the back up documentation to convince HMRC that the gifts are justified.

I do have excess income and spent significant time over the past weeks analysing all our expenditure and income sources ending up totally confused and with a severe migraine. Any advice on how best to handle this can of worms would be appreciated.

2) So many of us these days have children living in different countries with their families. All with different citizenship and residency situations in different countries. There seems to be very little information about IHT and general tax issues in relation to gifts and inheritance of money and pensions for children and grandchildren in this situation.

Best regards, Peter

16:52 Question 3

Hello Roger and Pete,

Thanks for a great series of podcasts. Some of them confirm what I already know and some give me insights, ideas and an understanding I didn't have. You provide a great service.

My wife and I are 54 and 55. We are getting divorced. The divorce is amicable and we want to share everything evenly. I take home £5k/month and she takes home £2.3k. We will split this evenly as long as we both work. Our pension funds are not of equal value.

I have DCs and SIPPs worth £800k and ISAs worth £100k. I also have a small DB pension that will pay out about £3k/year in today's money at age 67. My wife has a DC pension worth £210k and ISAs worth £220k. She has a DC pension that will pay about £2.5k/year in today's money at age 67. As you can see, the majority is in my name. This makes sense as I have worked whereas she has taken time off to raise our children. We have equal claim to the money in my mind.

I think the ISAs are straight forward. We can balance the value by selling some of hers and investing more in my name. The DC pensions are more difficult. By right I should give her £295k to make them of equal value but how do we do this?

We want to avoid expensive solicitors and accountants but are not sure if we can DIY this. Please share any advice you can give. Regards, Jay

25:43 Question 4

Hi Pete and Roger,

Thanks so much for what you do with the podcast. It's completely changed my approach to my finances, especially over the last year which has felt even more important after the birth of my son.

I have a question about investment platforms. I currently have about £70,000 invested in passive world index trackers via a platform. I estimate my total annual fees including fund and platform fees to be about 0.66% pa. I don't think this is terrible but I think it could be less. I'm considering transferring my investments (which is a mixture of stocks and shares ISA, LISA and (very small) SIPP) to a cheaper platform. Do you have an advice on the transfer process, especially in whether to transfer all the funds in one go or is there a strategy you'd recommend to avoid falling foul of market fluctuations?

Thanks, Jack

30:47 Question 5

Hi Pete and Roger,

You guys are the best. You've given me my only financial education. Never underestimate what a difference you are making to ordinary people's lives. THANK YOU.

I am 42 years old saving into my workplace DC pension. I have a bit of a gap because I started late and then freelanced for a few years, so playing catch up, but thanks to you both, seeing the positives in this, rather than beating myself up.

I am basing the 'gap' on not quite having 3x salary saved by age 42 - is that a decent rule of thumb?

As you both say, arming people with knowledge can be a good thing and a bad thing, because armed with this new knowledge we can go off and overcomplicate things.

I decided to pull my pension from the default fund and pick 6 funds. What's the best route for working out if I am paying too much in fees, if I have got too much crossover across funds, and if the more pricey ones are worth it?

Do I need to get financial advice or could I do this myself (being a complete layman obvs)? Do you have any tips on the process of comparing, finding inefficiencies and consolidating?

What's a reasonable number of funds would you say? 3? 1?

BTW I've done the same thing with my ISAs since they let us have more than one. How do you just pick one and stick with it, and not get distracted by the new shiny providers? It seems like newer, better products and platforms come out all the time. Or am I worrying unnecessarily and might it be ok to have fingers in many pies?

Thanks again for all you do. Hayley

37:47 Question 6

Thanks for all the content, I listen to every episode and often share the pod with others to share the good word!

My partner will soon be able to get her NHS pension. While we were looking at the numbers, I began to wonder whether there is any benefit in taking the maximum lump sum and investing it outside of the pension. My thinking was that she would probably be able to generate the same amount of income from investing it in the stock market, but that when she dies she will be able to pass the capital on, whereas her pension will just stop paying out.

I think the maximum she can take is about £70k. Presumably she could put this in a GIA and feed it into an ISA over a few years, accepting that any gains in the GIA would be subject to tax. I just wondered if there were any other tax implications that I hadn't considered?

If not, then presumably it's just a case of comparing the drop in the annual pension payment against the expected returns (after tax) from investing outside the pension?

Would love to know your thoughts on this. Thanks again, and keep up the good work. Tim