Can you split an offshore pension on divorce?

 In Tax

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Offshore pensions on divorceDivorce is big business! Statistics vary from one in five to one in three marriages ending in divorce.  The pension is often one of the biggest assets (with the matrimonial home) and one spouse may have a much bigger pension than the other.

This article reviews the pension splitting options in the UK and then looks at whether these options are available for offshore pensions.

English divorce options

The English divorce courts are used to dealing with pensions and have a number of options. First, the divorce courts can offset the pension against other assets.  So one spouse might get the whole property (for example) and the other spouse could keep all his/her pension.  However, this approach can produce difficulties. The spouse who receives the house may have no cash with which to pay living expenses and the spouse with the pension may have insufficient means to buy somewhere to live.

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The Pensions Act 1995 introduced Earmarking Orders.  These are addressed to the pension trustees/administrators and order them to pay a part of the pension to the member’s ex-spouse.

The problem with earmarking is that nothing is payable until the member retires.  If the member dies before retiring, the ex-spouse could receive nothing at all.  And from the member’s perspective, there is uncertainty in that the Earmarking Order can be varied, so there’s no clean break.

Another potential downside of an earmarking order, for the pension member, is that s/he can be ordered to take a lump sum even if s/he doesn’t wish to do so.  This ensures the earmarking order can apply to give part of that lump sum to the member’s ex-spouse.

Finally, the Welfare Reform and Pensions Act 1999 introduced pension splitting.  The trustees are ordered to set aside a percentage of the pension (it doesn’t have to be an equal split) for the ex-spouse, as a ‘pension credit’.

This could be transferred to another scheme or kept in the same scheme, depending on the scheme rules.  In the UK now, pension splitting orders tend to be more common than offsetting or earmarking.

What about offshore pensions?

These rules only apply in the UK.  There can be problems where the spouse has an offshore pension, either because s/he transferred their UK pension offshore (to a Qualifying Recognised Offshore Pension Scheme /QROPS) or because they were working offshore at the time the pension was set up.

Local legal advice will be needed to see what can be done with the offshore pension on a divorce.  Many offshore countries do not have pension splitting rules, but the pension trustees may be wiling to facilitate any agreement between the spouses, if they can.

A detailed review of the foreign pension rules will be vital.  Usually only one of the spouses will be a member of the pension scheme.  The trustees’ initial view could be that providing funds to the non-member spouse would be a breach of trust.  However, the scheme rules may permit the trustees to add members, or may allow payments at the member’s request to settle debts etc.  So with the co-operation of the member spouse, it may well be possible to get funds to the non-member spouse or to transfer funds to another pension for his/her benefit.

Tax Advice

For offshore pensions, tax advice will also be vital to see what the net position is.  In the UK we are used to pensions being exempt from income tax and capital gains tax, and being outside the scope of inheritance tax.  This may not be the case with a foreign pension.  An offshore pension is usually liable to UK tax on any UK source income it receives and, from next April, may be liable to capital gains tax if the pension has invested in residential property (this will be unlikely for a QROPS but other types of offshore pension have no invest restrictions).

The inheritance tax position should also be reviewed.  If the offshore pension is not a Qualifying Non-UK Pension Scheme (QNUPS) then it will not qualify for the exemption from IHT that UK pensions receive.  A distribution of capital from such a pension may trigger an IHT ‘exit’ charge.

There may also be a difference in the tax status of the two spouses.  One may be UK resident but non-domiciled whereas the other may be both resident and domiciled.  This may mean that one spouse will be taxed more heavily on funds received from an offshore pension.

As with anything pension related, the devil is in the detail.  Just don’t assume the UK pension splitting rules apply to any offshore pension.

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