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Unlocking pension early when divorcing

Your pension can be the biggest asset after the family home, but because you do not benefit from it until you retire you can tend not to think about it.

If you separate from your spouse or partner, money can be tight. Often couples want to access some of the money in their pensions before they retire to put towards a deposit on a new home, pay for furniture or meet the costs of moving house.

Since the introduction of the pension’s freedoms in April 2015, savers aged 55 or above have been able to take money out of their pension pot in lump sums, and these are often used by separating couples.

But you should be careful before accessing a pension in this way as there are a number of consequences that could cost you dearly. For example you may be stung with a large tax bill.

Another way in which you could be affected is by the Money Purchase Annual Allowance (MPAA). If you withdraw taxable cash from your pension the MPAA may apply and you will only be able to contribute £4,000 a year to a pension in the future.

The good news is that a little-known exception to the MPAA means you can withdraw the entire fund of a ‘trivially’ small pension pot under £10,000 without triggering the MPAA. This could be useful if you need to release some cash on separation.

For example, if you have two pension pots, one worth £4,000 and another worth £20,000 and you want to withdraw £9,000, you are better off cashing in the £4,000 pension and just taking £5,000 from the larger pot (the 25% tax-free lump sum), rather than taking the entire £9,000 from the larger pot.

Commenting, Steve Webb, Director of Policy at Royal London said: “Last year, over half a million people aged 55 or over made flexible withdrawals from their pension, and many of these withdrawals will have been for amounts under £10,000. If they emptied out a small pot then this will have had no impact on their future ability to save into a pension. But if, by mistake, they took the same amount as a partial withdrawal from a bigger pot, they risk triggering stringent HMRC limits on future pension saving. Those with more than one pension pot should consider very carefully the order in which they access these funds, especially if they may want to contribute into a pension in future.”

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