January is the month with the highest number of divorces on record so we wanted to touch upon the importance of couples’ financial and pension planning.
Pensions can be one of the most valuable assets in divorce, usually second only to the family home and sometimes even more valuable. In addition, one spouse may have more pension assets in divorce than the other, and could face a significant loss of retirement income.
If you are facing a divorce or the possibility of divorce, the pension should be a central consideration in any financial settlement.
Find out below how to divide your pension assets fairly to ensure your retirement income is protected as much as possible.
How can I protect my pension if I get divorced?
“Pension protection” means different things depending on your position within your marriage. If you are the main breadwinner, you are also likely to have the largest pension savings, so your goal may be to keep as much of it as possible.
Conversely, if you have been the lower earner (or have focused on raising the family), then your pension savings may be much lower or even non-existent. Therefore, when you reach a divorce settlement, you should aim to secure enough pension assets to support you later in life.
How will pensions be distributed in a divorce?
In the event of a divorce, pensions are taken into account along with the other financial assets of the marriage. It is important to note that a divorce alone does not determine “who gets what” or who is entitled to housing, savings, etc. The allocation of assets is determined separately in a financial agreement or financial settlement. The aim is to achieve an outcome that is “fair and equitable.”
There are three main methods of distributing pensions:
- Sharing
- Offsetting
- Earmarking
Pension offsetting
Offsetting means that one spouse’s pension is offset against the other’s assets from the marriage, such as their own home or investment, so that both parties balance each other out as fairly as possible. Problems can arise with this method when the pension is the largest single asset and there are not enough assets to weigh them against each other.
Pension earmarking
Pension earmarking (or ‘pension attachment’) allows the ex-spouses to split the rights to the pension benefits once these become accessible (usually from age 55). Each ex-partner is entitled to a share of the pension benefits, corresponding to a percentage agreed in the financial settlement. This works a bit like a maintenance payment paid directly from the pension pot of the person who receives it. The drawback of this method is that the pension holder retains control of the pot, including the choice of investments and when the pot pays out, which could both reduce the value for the other person, and also delay when they can receive their pension.
Pension sharing
Pension sharing is probably the favourite option among divorcees. This allows the pension to be divided into two separate pots from the date of divorce. This allows each ex-spouse to retire when they want and access benefits when they want (from age 55). Pension sharing is popular because it offers the cleanest break and true independence from one another. It may also ensure a fairer settlement than offsetting (which can be a bit of an approximate method).
How is a final salary pension shared on divorce?
If either you or your ex-spouse are receiving a defined benefit pension (also known as a final salary), it can be more challenging to work out how to divide it fairly. Final salary schemes are not about an invested pot of money, but a guaranteed income for life, so the first question is how the ex-spouse (i.e. the one who is not a member of the scheme) can get their share.
There are two ways that a final salary scheme could be shared with your ex-spouse. One option is to transfer the pension into a pension pot, which can then be divided up in accordance with the terms of the financial settlement. However, the pension’s transfer value may not reflect the full benefit of the scheme.
Another option for sharing a final salary pension is for the scheme to pay out a portion of the guaranteed income to the ex-spouse. This is generally only possible if the pension scheme is restricting transfers out, or if it does not permit such transfers.
How can I get an accurate pension valuation when divorcing?
Regardless of whether or not you are the main shareholder in pension savings within the marriage, it is vital to have a proper assessment of all pensions held. This can be a more complex process than simply looking at the latest pension statements
For example, you may have several pension pots from previous jobs that need to be tracked and evaluated. Some of these may have additional benefits attached, such as a guaranteed annuity rate. Final salary pensions are particularly desirable, and their value for the purposes of a financial settlement may be far greater than their simple transfer value.
The biggest risk is that there may be old pensions you have forgotten about. A divorce financial settlement requires full disclosure of assets, so if you have ‘misplaced’ any pensions you may be open to accusations that you have tried to conceal some of your assets. You may then face costly legal action in the future, and a more expensive financial settlement.
How much of my spouse’s pension am I entitled to when I divorce?
Another way to ask this is: “How much of my pension can my wife (or husband) claim if we divorce?”’ As outlined above, this will be the subject of the financial agreement determined by the court. A financial agreement aims to achieve a fair and equitable settlement, and as a starting point, the entire assets are divided 50: 50. However, this equal split will probably alter based on the respective needs and circumstances of each ex-spouse.
Which factors can influence my share of pension benefits?
The court will take into account a number of factors when determining how financial assets (not just pensions) are distributed.
These include:
Children
Do you still have children who are dependent?
Which spouse will they live with?
Financial means
What other assets and income sources do you have?
Is this sufficient to maintain an acceptable standard of living? Will you have any responsibilities (e.g. caregiver)?
Health and age
The younger and healthier you are, the better (theoretically) you can improve your financial situation. Being older or in poor health can therefore lead to a greater proportion. Furthermore, if there is a large age difference between the spouses, the younger spouse may be awarded less.
The duration of the marriage
If the marriage lasted only a short time (e.g. less than 12 years), part of the pension assets built up before the marriage may be excluded from the financial settlement.
Contributions made to the marriage
The Court considers that the “breadwinner” and the raising of the family are equal contributions, so that the main breadwinner does not automatically have a right to more assets of the marriage. However, – to give a hypothetical example – if the children were raised largely by nannies and the stay-at-home spouse lived a life of leisure, this could well count against them in a settlement!
How long after a divorce can I claim my spouse’s pension?
Divorce alone does not settle your financial affairs, it simply means that you are no longer married. There is no time limit after a divorce for making a claim on your ex-spouse’s finances, unless the two of you have achieved a legally-binding financial settlement.
Therefore, it is highly advisable to seek a formal financial agreement. This is particularly important when the divorce is acrimonious, but even if it is a so-called “consensual” divorce, this legally binding agreement is a very good idea. Neither of you know what the future will bring, and if one ex-spouse finds themselves in serious financial difficulties in the future, it may be too tempting to pursue the other for more money, if that option remains open.
A legally binding divorce order will finally separate your finances from your ex-spouse, leaving both of you free to continue their independent lives.
Sometimes life doesn’t go according to plan. Divorce can be a testing time, and negotiating a fair financial settlement can often add to the stress. When it comes to pensions, what can be divided depends on where in the UK you are divorcing.
To start understanding where your retirement savings may stand after a divorce, please schedule an appointment by clicking here or email us at [email protected], we’d be glad to help.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
We do not provide advice on defined benefit pension transfers.
The value of investments and income from them may go down. You may not get back the original amount invested
Headway Wealth Ltd are authorised and regulated by the Financial Conduct Authority
