Be careful what you wish for!

In her second interview with Keith Churchouse a Chartered Financial Planner and Wealth Manager, Manders Law Managing Partner, Mary-Ann Wright, speaks to Keith about pension rules, changes and commercial property fund moratoriums which have again been established in response to the significant effects of the COVID-19 pandemic. If you are currently engaged in divorce proceedings, contemplating proceedings or advising clients in this area, the information and practical guidance below will be of relevance to you.

About the Interviewee

Keith Churchouse is a Certified Financial Planner, Chartered Financial Planner & Chartered Wealth Manager. He is also a Fellow of the Personal Finance Society (FPFS) and will celebrate 35 years in UK retail financial services later this year. His qualifications also include a BA Honours degree in Financial Services from Napier University. Since October 2004 he has been the director and co-owner of Chapters Financial Limited, which is a Chartered Financial Planning company based in Guildford.

Keith penned the book, Sign Here, Here and Here! Journey of a Financial Adviser in 2010 and has followed this with additional texts, including The Recession is Over Time to Grow and Scared of Something Different: Journey of Business Disruption & Innovation. As he notes at the start of his popular book, Sign Here, Here and Here!“Add to your world, it makes life a lot easier and any income created becomes a consequence rather than a target.”

Question

Do you know what the end result of any proposed settlement on divorce will mean for your personal finances?

You have gained a Decree Nisi, perhaps not difficult, and you’re now heading for the Decree Absolute with the guidance of your solicitor. Now the thorny topic of money has to be negotiated and figures, assets and values are being shuffled around the table.

Values offered, and counter offered may all look the same at face value. However, if pensions are in the mix, it is important to take into account the numerous rules to which a pension arrangement must adhere. Therefore, the way you use £1 of cash in, say, a current account is different to £1 from a pension fund. A good example, confirmed by the government this month, is the increase in the minimum retirement age from 55 to 57, commencing in the tax year 2028.

Looking forward, if you are divorcing and part of any proposed settlement includes pension benefits to be drawn at your age of 55 after 2028, you need to know that this won’t work based on the confirmed rule change.

This is only one example of pension rule changes that might mean that any pension sharing order achieved doesn’t add up to the result you had planned for your personal finances. Before agreeing to any pension share as part of your settlement, get it checked by a qualified financial adviser to show you what the real end result might mean for you.

Pension changes, and proposed changes may make a lot of difference when considering pensions, especially on divorce, and there are some topical changes to pensions law taking place now, and others which may be on the horizon.

Question

What could this mean for parties who are divorcing?

The significant effects of the COVID-19 pandemic, potentially lengthy notice periods for some pension fund redemptions, possibly preventing investors from accessing their money has caused concern to investors and the financial regulator alike. Moratoriums for commercial property funds were established by most funds over the summer 2020, with some of these restrictions now being lifted.

As we know, people’s lives change, perhaps because they are heading for retirement, divorcing or sometimes both. With a possible uplift in the number of people requiring their tax-free cash and income to be drawn as they, or their spouses/civil partners, leave employment, the positions that some fund managers have taken might cause real problems if there is to be a significant delay in allowing parties to access their funds.  As a result, the UK regulator, the Financial Conduct Authority (FCA), has stepped in with focused proposals to control significant elements of the system. These proposals are noted in their consultation paper CP20/15 of August 2020 entitled ‘Liquidity mismatch in authorised open-ended property funds’. This applies to UK authorised property funds that are non-UCITS* retail schemes, or NURS for short. The document can be found here:

 https://www.fca.org.uk/publication/consultation/cp20-15.pdf .

For reference, the consultation ends on 03 November 2020.

* UCITS stands for Undertakings for the Collective Investment in Transferable Securities. This refers to a regulatory framework that allows for these types of funds to be promoted and sold across Europe.

The FCA is consulting on the introduction of what it believes to be a fairer system by proposing a 180-day notice period for investments to be withdrawn from an open-ended property fund. The intention is to allow fund managers more time to plan sales of property holdings to fund redemption requests (if required), meaning that a larger proportion of the fund could be allocated to property holdings as a lower cash buffer would be needed. However, such a long redemption period could prove to be a significant disincentive for retail investors to add new money into property funds, and of course may present issues for those already invested, including those who hold property funds within their pension arrangements.

If this change is confirmed, those using pension funds immediately after a divorce might find a delay in accessing tax free cash and income that is invested in property funds. This needs to be factored into any cashflow positions that a separating couple anticipate when the financial settlement is finalised and implemented.

Question

Can you explain the background to the recently proposed property fund restrictions?

By way of background, moratoriums (usually for up to six months) on the ability to be able to trade funds within commercial property funds in a pension (or funds) are nothing new and are a tool that fund managers can use to protect the fund assets in the case of significant variances in cash flow. Following the vote for Brexit in the UK in the early summer of 2016, most commercial property funds placed moratoriums on their funds because of concerns that many investors would seek to encash their holdings. Had this come to pass the pressure on managers to sell commercial property assets, perhaps at a time they did not want to, to meet the outflow demand would have been significant. As concern wavered, many moratoriums were withdrawn by early autumn 2016.

Question

If I do take financial advice, when should I contact a Financial Planner?

With the example changes mentioned above, it is clear that there are complications to pensions that may affect the real outcome of a pension benefit secured by way of a pension sharing order. You would not want to find out that the order secured does not in fact give you what you had anticipated when all is settled and implemented.

As a Financial Planner, I advocate for an early consultation with a suitably qualified Financial Planner, to make sure that any pension benefit being offered as part of the financial agreement will give you what you want, such as the level of income you anticipate, or the ability to release tax free cash where available.

Pensions, their rules, regulations and asset allocation can be complicated and identifying any flaws in a divorce strategy can be identified before they are agreed as a settlement.

Managing expectations of future pension benefits is everything!

For an initial FREE consultation on any aspect of family law, call Manders Law on 01245 895 105 or email us here.

Note: this blog is intended to give an overview (rather than comprehensive guidance and advice) on your legal or financial position and is provided for information only. It is not an endorsement of any product or service provider.