Breaking up could be even harder to do

THE GOVERNMENT is being urged to make radical changes to a new Bill for splitting pensions on divorce, amid fears it may stop hundreds of thousands of divorcees from building up a decent retirement income.

In a 280-page report on the Bill issued this week, MPs on the Social Security select committee warn that divorcees may suffer, because the Bill limits the amount of pension contributions that can be made following a divorce.

The Pension Sharing Bill, to be introduced to Parliament next month, will allow divorce courts to order that pensions be split in two as part of a divorce settlement, giving wives the right to a share of their husband's pension - and vice versa.

MPs on the committee are increasingly concerned about a clause that caps the amount divorcees can contribute to a pension after divorce. The MPs fear that the cap, if it is not removed, will create a new class of divorcees, mostly men, who will be blocked from rebuilding their retirement fund after divorce.

Under current laws, pension scheme members can contribute up to 15 per cent of their salary every year to a tax-free occupational pension, giving members the chance to build up a pension to replace most of their salary. Payments to personal pensions are also capped in the early years, at 17.5 per cent of salary.

But under the Bill, any divorcees whose pension has been split will have contributions capped at a lower rate, sharply limiting their ability to save for retirement.

The cap stems from fears about abuse of tax relief by divorcees. After splitting a pension on divorce, one pension becomes two pensions, with two sets of tax relief.

John Denham, the pensions minister at the DSS, says he is concerned that this would give divorcees a tax advantage over married couples. The Treasury also fears that without the clause, the Exchequer will be landed with a big bill for extra tax reliefs caused by divorcing couples contributing more.

Edward Leigh, a Conservative member of the committee, says: "I don't think anyone has researched what the true social effects of this would be. Men will get divorced to find they have less than half their pension. There is going to be an enormous backlash against this."

Peter Murray, chairman of the National Association of Pension Funds, says: "After two divorces, an employee [might] receive just over a quarter of their final salary. They would have lost most of their pension." In that case, he added, "an individual would have absolutely no scope for rebuilding a pension at all."

The MPs believe the Treasury has gone "totally over the top" in defending its tax reliefs and want the clause to be abolished. According to their estimates, the cost to the Exchequer would be just pounds 4m a year.

The Bill also proposes to allow divorcing spouses to move their new chunk of pension rights to their own private scheme. But not if they are married to a civil servant, a teacher, a fireman, a nurse, or anyone in an unfunded, public sector pension scheme. Behind this clause is another Treasury fear about pension-splitting. Unfunded schemes, mostly in the public sector, are set up to pay out a pension on retirement, not on divorce. They have to be financed from the Budget.

The Treasury believes that if a large number of public sector workers get divorced, the Government could find itself with an unbudgeted outflow of public sector funds. But the MPs say this is a tiny figure against the pounds 7bn the Treasury pays every year in national insurance rebates to private pension schemes.

Archy Kirkwood, the Lib Dem chairman of the committee, says: "The fingerprints of the Treasury are all over these issues. But I don't think their evidence stacks up."