Pension perks and family finances: the Spring Statement 2023
In his Spring Statement this week, the Chancellor Jeremy Hunt outlined his “back to work” budget.
The government’s aim is to enable the economically inactive to return to work without loss of income. Equally he wants to make sure that those approaching retirement with large pension pots will not be taxed to stay on working longer.
So, how will this affect:
- Couples, and especially parents and families, as they consider separation and divorce
- Those in the process of arranging their financial settlements
Let’s start with the families.
Two sets of bills
Many couples considering divorce have to think long and hard about the economic impact, especially in the current cost of living crises. Once a couple separate or divorce, costs that were shared suddenly become two sets of bills.
For example, both partners will require somewhere to live, so:
- A joint mortgage may split to become a single mortgage payment and rental costs
- There will be two sets of utility bills, dual rental/mortgage, possibly increase in travel costs to work, and an increase in food costs for the non-resident parent.
For both parents facing new bills, the budget headlines are:
- The government subsidies capping household energy bills to around £2,500 a year has been extended until the end of June.
- The energy unit costs for those with prepayment meters (which may be found in rental properties) will be brought into line with those who pay by direct debit.
ANNE SAYS:
For separating families, any additional help is welcome, as the cost-of-living crisis has compounded the financial strain especially in the early stages of running two households.
Working and childcare
One of the big struggles for newly separated parents is that the resident parent (the parent the children live with) may not have previously worked, or worked less hours than their spouse. The Spring Statement extends the availability of the 30 hours of free childcare a week to include:
- One and two-year-olds (from April 2024)
- £600 "incentive payments" for new childminders, which should increase the number of places / choices available for parents
The aim is that with additional free childcare available for younger children, working becomes more viable for parents.
According to the BBC website , responding to Office for Budget Responsibility (OBR) figures, a Treasury spokesman stated that:
“Extending 30 hours of free childcare to parents of nine months to two-year-olds is estimated to bring 60,000 more people into the workforce, particularly women, and will lead to many more increasing their hours – helping to grow the economy and raise living standards for everyone."
Recently divorced parents may need that extra income, as the same OBR predicted that the next two years would become "worst on record" for household income.
That’s why the government are putting £63m into programmes to encourage retirees over 50 back to work, so-called “returnerships" and skills boot camps. So those divorcing later in life, the “silver splitters”, may enjoy better job prospects that previously.
RITA SAYS:
Childcare costs are one of the most important factors when considering a financial separation. It determines the feasibility of a parent who has previously been the main carer returning to work. Often the crippling costs of childcare have made this unviable, so any additional financial support with childcare costs will be a welcome measure for families.
We need to consider also that the return to work is not just a matter of number crunching. The children must always be the primary concern, and therefore a return to work must factor in their needs. There also may be a skills gap or confidence issue that must be addressed, especially when someone has had a long career break.
These additional factors of encouraging the over 50s to return to work are particularly salient. If someone has been out of the workplace in a traditional marriage, it may be very challenging for them to return to work. Any support with this, especially with refreshing skills will be positive.
Separation generally means that in needs cases, those traditional roles may no longer be viable and that both parties will need to work.
We must also factor in though considerations and wellbeing around women going through the menopause.
Private Pension Pots
Much has been made of the cap on the amount anyone in employment can contribute to their private pension during their lifetime before paying tax on it. In his Statement, the Chancellor scrapped the contributions limit of £1.07m completely. He also increased the tax-free yearly allowance for private pensions from £40,000 to £60,000. (Given that this had been frozen for nine years, it’s not exactly generous!)
The cap on contributions had been dubbed the “doctor’s tax” because senior NHS consultants were retiring early to avoid being taxed on their pensions above the cap. As the Chancellor stated in his speech:
“I do not want any doctor to retire early because of the way pension taxes work … As chancellor, I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons.”
A £1million pension pot may seem a lot; a headline in The Guardian estimates it affects only 1% of the population. However, spouses who have worked in senior positions for prolonged periods of time may well be close to this limit many years before their retirement date.
In turn, their spouse (and it has to be said, usually the mother) may have taken time out to raise their children. As a result, their pension pot may be considerably less. According to pension provider Aviva;
“The gender pension imbalance persist(s) into retirement with women aged 60-65 years old having pension pots which are on average just over half (57%) the size of men’s pots at the same age.”
ANNE/RITA SAYS:
Why is this important? As family lawyers, we help separating couples draw up their financial settlement based on the value of their assets at the time of divorce. So, a couple may look at the higher earner’s pension for example, which is worth around £750,000, and at the value of the family home, which is around the same. Couples may be tempted to simply “swap” one for the other.
However, with the cap removed, the “pensions spouse” can continue to contribute and grow their pension, allowing them to look forward to a retirement lifestyle funded by their pension for around 30 years.
The “house spouse” has a property that may not increase in value by as much as the pension. The home may require funding in terms of repairs and improvements that might not be ultimately reflected in its value. More importantly, the “house spouse” can only access the full value of the capital in the house by selling it. (More on this in a future blog!)
The main message here is that pensions are valuable assets and specialist advice is needed to consider them.
Understanding the financial implications of divorce
If your marriage has irrevocably broken down, it’s hard to think beyond the immediate need to disentangle yourself and your finances from your spouse. With the paperwork for divorce now available for couples to complete online, it’s also tempting to “get it over with”, and not look at the long-term financial implications.
At LGFL, we take a holistic view of divorce so you can understand how it will impact across your life and prepare for that. Over the last few months, we have helped couples with financial settlements once they have started the new no-fault divorce process online and realised it’s a lot more involved (and with children, more complex) than they imagined.
For expert advice and a pragmatic approach to separation and divorce:
- Call us