The Taxation of Pensions Act 2014 and Duxbury Funds

The extent to which the increased flexibility afforded under the Taxation of Pensions Act 2014 to holders of pension funds may impact on the structuring of income provision in retirement in financial remedy orders was previewed by Mostyn J in JL v SL (No 2) [2015] EWHC 360 (Fam) and JL v SL (No 3) [2015] EWHC 555.

In JL v SL (No 2) Mostyn J was exercising the statutory discretion anew having allowed an appeal from the first instance decision of District Judge Reid.

The wife was to receive total capital of £2,907,471 and a pension sharing order of £650,000. After allowing for housing need of £955,000, the wife would have surplus capital of £1,302,491, described by Mostyn J as her “investment fund”.

District Judge Reid had found that the wife’s income needs were in three phases, as follows:

1. Phase 1. Years 1 – 3: £75,329 p.a. while the youngest child was in tertiary education
2. Phase 2. Years 4 – 10: £55,964 after deduction of earnings of £13,007 net to age 60
3. Phase 3: Years 11 – death: £68,981 p.a.

In respect of Phase 3, a Duxbury calculation yielded the sum of £1,191,357. From that sum, Mostyn J simply subtracted the sum of £650,000 pension share “which should then be brought into action”, leaving a shortfall of £541,357 which “needs to be carefully preserved by the wife from her investment fund”.

Thus, the £650,000 pension pot was applied pound for pound towards the £1,191,357 Duxbury fund required for Phase 3.

In his supplementary judgment, JL v SL (No 2), in response to an application by the wife for amplification of calculations and of allegedly inadequate reasons, Mostyn J expanded on his reasons for treating the pension fund in this way, as follows [para 6]:

“In my principal judgment I used the Duxbury algorithm to calculate the wife’s needs for the three phases I identified. I started with phase 3 (see para 58). The figure calculated was £1,191,357. I found that part of this fund would be met by the wife’s pension share of £650,000. That was a perfectly reasonable assumption to make given the increased flexibility afforded to the holders of pension funds by the Taxation of Pensions Act 2014, which received royal assent on 17 December 2014. It probably would have been a reasonable assumption even had the reform not been enacted. I heard no argument to the contrary at the hearing. It would have been unreal to take some annuity figure calculated by a pension expert for the trial before District Judge Reid in October 2013 well before the pension reforms were announced in July 2014.”

The obvious disadvantage to the wife of this approach is that it results in all of the wife’s income in retirement being risk laden, relying on the Duxbury assumptions as to life expectancy, income yield, capital growth and inflation. Whereas, had the calculated annuity income figure been used in respect of the pension fund, and only the shortfall in income after receipt of the annuity income being subject to the Duxbury calculation, the wife would at least have a proportion of her income not reliant on the bearing out of the Duxbury assumptions and guaranteed for however long she may live.