Divorce can be a traumatic and emotional time for obvious reasons, but the financial decisions you make when going through divorce could have long-lasting consequences for both parties. Particularly when it comes to one of the more valuable assets at stake: your pensions.
To help secure your future financial wellbeing, it’s crucial to include your pension savings as a key part of your divorce proceedings. In this article, we explore some of the strategies you might use to protect both parties’ retirement income.
Dividing your pension
The division of pension assets during a divorce is decided through a financial agreement between parties, with the goal of achieving a fair settlement for both. It’s not the act of divorce itself that determines the split.
The approach you take might vary depending on your situation in the marriage. If you’ve earned less over the years (perhaps you’ve chosen to stay at home to raise the family), your pension savings will be significantly lower or non-existent. You may feel entitled to a share of your soon-to-be ex-partner’s pension pot as a result. Conversely, if you’ve been the primary earner (allowed to concentrate on your career and boost your earnings), your pension savings will probably be more substantial than your partner’s. You might also feel you’ve earned this money and you’d like to keep as much of it as possible.
So how do you both ensure a fair and equitable split?
There are two primary methods for splitting pensions: offset and pension sharing.
- The offset method involves offsetting one partner’s pension savings against the other partner’s assets, such as the family home or investments, to achieve a balanced settlement. However, this method can cause problems if the pension is the largest asset and there aren’t enough alternative assets available for offsetting.
- Pension sharing is the preferred choice for many divorcees. Here, the Court will issue an order detailing how much ‘pension credit’ the ex-partner will receive (by percentage or £ amount). Depending on the scheme rules, the recipient of the credit could then join the original pension scheme or transfer it to a new or existing scheme. There are fees involved, and you’ll need advice when it comes to arranging the transfer, but pension sharing can provide a cleaner break and generally results in a fairer settlement than offsetting, which can be imprecise. This option is also available for pensions that are already paying out.
Dividing Final Salary Pensions
Splitting a final salary pension (also known as a Defined Benefit (DB) pension) is more complicated. They typically pay a guaranteed income in retirement, so you’ll need professional advice when it comes to calculating a fair share for the partner who isn’t the scheme member.
The two options for sharing a final salary pension with an ex-spouse are:
- Transfer to Defined Contribution:
Transferring the pension in this way allows it to be shared using the options outlined earlier. However, not all DB schemes permit transfers out; even if it does, the transfer value may be less than the pension benefit. - Guaranteed Income Share:
The pension scheme provides a portion of the guaranteed income directly to the ex-spouse. This option is generally only available when the pension scheme either restricts or does not allow transfers.
Obtaining an accurate pension valuation
Regardless of who the primary pension holder is or which method you’ve agreed on to split your pensions, obtaining an accurate valuation of all pensions held between you is paramount when going through a divorce. This entails more than reviewing the latest pension statements. You and your ex-partner may possess multiple pension pots from previous employers – all of which need to be traced and assessed. Some of these schemes might have additional benefits attached, such as a guaranteed annuity rate. Final salary pensions, in particular, hold significant value for financial settlements, often exceeding their apparent transfer value.
Dividing your pension assets fairly
A common question asked is, “How much of my spouse’s pension can I claim when we divorce?” or “How much of my pension is my ex entitled to?”. When splitting assets during a divorce, you will typically start with an equal division and subsequently apply other considerations based on the needs and circumstances of each ex-spouse.
These may include:
- Children: Do you have dependent children? Which spouse will have custody, and for how long?
- Financial means: What other assets and income sources do you have? Is it sufficient to maintain an acceptable standard of living, and are there any caregiving responsibilities that need to be taken into account?
- Health and age: The younger and healthier you are, the more able you are (in theory) to improve your financial position. Being older or in poor health may therefore entitle you to a greater share. Also, a big age gap between the two of you could result in less being awarded to the younger partner.
- Length of the marriage or civil partnership: If the partnership lasted for a relatively short period, assets accumulated before the marriage may be excluded from the financial settlement.
- Contributions to the marriage or civil partnership: The court will consider what each partner contributed to the relationship in terms of earnings and taking care of the family. Both types of contribution are considered equal; the court doesn’t assume that the person who makes the most money automatically gets more.
Seek expert advice
Protecting your pension during a divorce is vital to securing your financial future. It’s important to seek the services of an independent financial adviser to work alongside your solicitor. They can explain the various methods for dividing pension assets, value your pensions accurately, and consider the factors that influence the distribution of benefits so that you can negotiate your divorce settlement with greater confidence.
Why choose Amber River Financial Planning?
Financial decisions can cause friction in every relationship, even at the best of times. But in the middle of a divorce, untangling years of financial ties can be difficult and stressful. The decisions you make during your divorce can significantly impact your financial future. That’s why it’s important to involve a financial planner, alongside your solicitor, from the start.
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Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
