Pensions are often the single biggest asset for divorcing couples and, according to figures from the Office for National Statistics (ONS), make up 42% of total household wealth. To put this into perspective, the share of wealth held in property is just 36%.
Changes to the law in 2000 allowed divorcees to share pensions, yet, according to research, few divorcing couples seem to take this into account.
Matrimonial Property is one area where solicitors may be brought to account many years after the divorce has concluded if pensions have been ignored.
In fact, 58% of people who took part in a Which? survey said pensions weren’t even discussed during their divorce proceedings.
Now, with the introduction of the “no-fault” divorce rule, which came into force in England and Wales in April, it is more important than ever for divorcing couples to understand the impact that separation could have on their finances and retirement plans.
There is now no need to play the blame game and clients who are committed to sorting their divorce amicably are able to do so through less adversarial methods such as mediation, often with the assistance of a Financial Neutral – a financial planner who assists both parties in divorce cases.
If you don’t understand the financial products you have amassed as a couple, you can’t make informed decisions and this can slow down the process.
A Guide to the Treatment of Pensions on Divorce “The PAG report” in July 2019 stated: Ignoring the pensions or stating on the D81 that “the clients have agreed to ignore the pensions” is not an option.
So, with all that in mind, here are six important things to understand when it comes to dividing your pension savings on divorce.
1. Pensions should be treated as matrimonial assets
Many people don’t realise that a pension is considered a matrimonial asset in a marriage. This is the case even if only one spouse has accrued pension savings as both parties are considered to have contributed equally to the marriage.
Unfortunately, even before divorce complicates matters, pension wealth is unequally distributed between married men and women.
A study carried out by the University of Manchester showed the average married woman aged between 65 and 69 has just £28,000 in pension wealth. Meanwhile, the average man has almost 10 times that.
Source: University of Manchester
With fewer than 15% of couples having pensions of approximately equal value, failing to split pension savings during divorce can leave women significantly worse off.
Although in Scotland, only pension rights built up during the marriage or civil partnership will be regarded as marital assets, in the rest of the UK, all pension assets are usually treated as marital assets in needs cases. A sharing basis where there are significant assets may ringfence pensions built up prior to the marriage in the rest of the UK.
2. Pension savings are often the biggest asset in a divorce
In some cases, pension funds can be worth more than the house you share.
However, when discussing the division of assets, some women are advised to focus on the family home, especially in cases where children are still living at home.
While it may sound sensible for one of you to take the house and the other to get the pension pot, when it’s time to retire, the partner who took the property could find themselves without any income to live on. There are several methods of splitting the family home and this all needs consideration in the round.
If this happens, the person who kept the property may be forced to sell the house to generate the income needed in retirement. Particularly as spousal maintenance only tends to fund until retirement and may not consider income requirements into retirement.
This is why it’s so important that both parties consider pension assets during divorce, that these are distributed on a needs/sharing basis and that all options are considered for both pensions, the marital home and other assets to get the best outcome for both parties going forwards.
3. Understand what kind of pension arrangement you have and get an up-to-date valuation
When you’re discussing how to split your assets, start by getting a valuation for your pension(s). With a letter of authority, a Financial Planner can assist here and ensure all the right questions are asked in terms of the options for splitting the pension to aid discussions.
A final salary or defined benefit (DB) pension can be particularly valuable, as it is based on how many years you’ve worked and the salary you earned. If either of you have a final salary or DB pension, you’ll need to think carefully and plan how it will be divided.
When pensions are involved in your financial settlement, it’s worth getting advice from an expert financial planner who can work alongside an actuary, if required. A financial planner can help you understand how to divide the assets on a Needs/Sharing basis and illustrate how decisions surrounding your pension funds will affect your future retirement plans.
4. 3 ways your pension savings could be divided
There are three main options for dealing with pensions in a divorce:
- Offsetting their value against other assets
- Sharing them on a clean break basis
- One partner earmarks some of the income to be paid to their ex-spouse after retirement.
Here’s how each option works in practice…
Offsetting their value against other assets
As the name suggests, with offsetting, the value of any pension is offset against the other assets.
This means that if, between you, you own a property worth £300,000 and a pension worth £300,000, one of you might choose to keep the pension while the other keeps the property.
There are some drawbacks to dividing assets using offsetting.
For example, the party who takes on the property may need to sell it to generate income to live on in later life. There may also be significant costs for maintaining a property that you should also take into consideration.
Conversely, there are significant tax benefits in owning a pension. Pensions offer tax relief on contributions, and, unlike property, pension funds typically fall outside your estate for Inheritance Tax purposes.
Pension sharing for a clean break
With pension sharing, the pension benefit is split and divided between both parties at the time of the divorce. The partner without the pension will get a share of the pension benefits transferred into their name.
The good thing about this method is that it ensures a ‘clean break’ and both parties know exactly what proportion of the pension they will receive or keep on divorce.
One partner earmarking some of the income to be paid to an ex-spouse after retirement
Earmarking, also referred to as a “pensions attachment order”, allows the partner without the pension to receive income or lump sum payments from it in the future.
Pension benefits are effectively “earmarked” for the other party in retirement. If the pension scheme member dies, the court can order that some or all of the survivor pension or lump sum death benefits be paid to the other partner.
The main drawback with this method of pension division is that the party without the pension must wait until their ex-spouse retires or dies before they receive any pension benefits.
Another problem with this approach is that the recipient of the “earmarked” benefits has no control over the investment decisions their ex-partner may take.
5. There’s no set formula as to how your assets will be divided
Should you end up settling your divorce in court, the judge will seek to achieve a settlement based on each party’s needs. Typically, separating couples start at a 50:50 split, but this may be adjusted if it fails to meet each party’s needs.
Because each divorce settlement is different, the treatment of any pensions will also vary from case to case.
6. Once the dust settles, get on top of your retirement plan
If you lose a portion of your pension savings as part of your divorce settlement, it’s wise to start saving to make up the difference as soon as possible.
Using intelligent cashflow modelling, we can help you visualise what the sum lost will mean for you and your retirement plans and create a plan to help you rebuild your retirement savings.
If you need advice on how to split your assets during a divorce proceeding, we can help. Seeking expert advice will help you to rebuild your resources and limit the negative effects of giving away a portion of your pension. In some cases, it may even be beneficial to give up some of your pension if you’re close to the Lifetime Allowance and are able to re-build your pension with the benefit of higher rates of tax relief.
Get in touch
To learn more about how to protect your financial interests when you’re getting divorced, or if you want help planning your new future following separation, get in touch. Email email@example.com or call us on 01275 462 469.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.