Pensions are often one of the biggest assets on divorce, but they are also frequently misunderstood or overlooked - particularly when it comes to the tax that may sit behind them.
A recent Ombudsman decision (Mr R (CAS‑104796‑R9Q9)) highlights an important and often misunderstood point that some tax liabilities stay with the original pension holder, even if the pension itself is shared.
In this case, the husband’s pension was already subject to a lifetime allowance (LTA) tax charge. When the parties considered sharing that pension on divorce, the question was whether that tax liability could effectively be passed to his ex‑wife. The answer was no.
The Ombudsman confirmed that:
- the LTA tax charge remains the personal liability of the original pension holder
- it does not transfer to an ex‑spouse through a pension sharing order
Why does this matter?
This matters because pensions should always be properly considered as part of a financial settlement, including any tax which affects their real value. A pension can be divided on divorce, but the tax attached to it does not always follow.
In practical terms:
- one party may remain responsible for historic tax charges, even after sharing
- the true value of a pension needs to reflect any tax already built in
- getting this wrong can skew negotiations and lead to an unfair outcome
The case also shows how important it is to have accurate pension figures during proceedings. Here, incorrect valuations caused delay and uncertainty, even though they did not ultimately change the outcome.
The takeaway is simple: understanding who pays the tax on a pension is just as important as understanding how it is divided.
At Stevens & Bolton, we regularly advise on divorce settlements involving complex pension arrangements. Whilst we cannot provide financial or tax advice, we work closely with specialist, trusted experts who can.
It is key in divorce proceedings to understand the true value of an asset in the short, medium and long term, as this will inform decision making. Taking early, comprehensive advice will not only ensure the ultimate settlement is structured properly, it might also identify opportunities for proactive and robust financial planning.
