Going through a divorce is an incredibly difficult process. Not only are you dealing with emotional challenges, but you may have to split up assets too. One key asset that’s often overlooked is your pension.
For many divorcing couples, pensions are among their most valuable assets. Yet, they often aren’t given the same level of attention as property, savings or material goods.
Research indicates that a man aged between 25-34 and making just the minimum auto-enrolment pension contributions over his working life would end up with a pension worth £142,836, For women, it’s predicted to be £126,784. For the majority of people, only their property will be worth more than their pension. So, why doesn’t it attract the same level of attention during divorce proceedings?
For the majority going through a divorce, retirement can seem a long way off. As pensions may not be a part of your day-to-day finances, they may not even cross your mind during a divorce. However, failing to factor them in could harm your financial future.
The good news is that pensions are more commonly being considered during divorces. Since 2011 statistics from the Family Courts show a continued increase in the number of couples that are formally splitting their pensions.
So, what are your options?
1. Pension sharing
This is the most common option currently used. Pension sharing orders were introduced in 2000, offering a legal way for pensions to be split. Between 2015 and 2018 the number of sharing orders made have increased by 40%.
If, when divorcing, you have no pension or a pension that is of a lower value, you may be awarded a portion of your ex-partner’s pension. You receive this sum, known as pension credit, now. You must place pension credit into a pension, you can’t use it for other purposes. However, you have control of where it goes. You can choose to deposit it in an existing pension or open a new one. With a pension sharing order, you’ll have no further entitlement to your ex’s pension.
One of the key benefits of this option is that it allows you to make a clean break from your spouse or civil partner.
In terms of securing your retirement finances, a pension sharing order is a relatively straightforward option as it’ll be deposited into a pension. But there are some important considerations:
- Will you deposit the pension credit into an existing pension or open a new one?
- What level of risk will you take with this pension?
- Will you continue to contribute to the pension?
- What income will it provide you at retirement?
If you have a larger pension than your partner, you may find you lose a portion of it during the divorce process. If this is the case, reassessing the impact it’ll have on your plans should be a priority. You may find that it’s necessary to increase contributions or adjust plans to achieve the lifestyle you want.
Even if retirement is some way off, understanding how a pension sharing order affects your future is important.
2. Pension earmarking
Pension earmarking (also known as pension attachment orders) isn’t as popular as pension sharing orders, but the number is rising. Between 2015 and 2018, the number of pension earmarking orders made increased by 60%.
With a pension earmarking order, a portion of one person’s pension is allocated to the other. However, it’s not available until the original pension holder starts to draw retirement benefits. The amount a pension allocated can either be a defined sum or a percentage (if you live in Scotland, it can only be received as a lump sum).
This option can be useful, but it means your retirement plans will continue to be tied to those of your ex. What happens if they delay accessing their pension? You need to assess how your retirement plans are aligned and remember that they can change. As you don’t have control of the pension, it can be difficult to effectively plan for your future. It’s often a good idea to take other steps, as a result.
If you’re giving up a lump sum of your pension or a portion of it through a pension earmarking order, planning is, again, important. How would removing a lump sum affect your income? Would losing a portion on an ongoing basis affect your lifestyle? Careful planning can help give you confidence.
3. Pension offsetting
Finally, you may choose pension offsetting. This can be an attractive option as it allows for a clean break and preserves both parties’ pensions.
With this option, the person with a smaller pension will receive a higher portion of other assets in return for giving up pension entitlement. This may mean they take a larger share of cash savings or property wealth. Weighing up how much a pension is worth and a fair portion of assets to offset can be difficult.
If you receive a greater share of assets at divorce thanks to pension offsetting, keep your long-term plans in mind. A larger share of cash savings can seem like the best outcome now, but if you look ahead 20 or 30 years, you may find that you’ve missed out. Think carefully about what you’ll do with the assets and how they’ll help you achieve aspirations.
If you’re going through a divorce, it’s likely your priorities have changed significantly. Reviewing your financial plans can help you move towards new short, medium and long-term goals that reflect your aspirations. If this is an area you’d like support in, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be used on your individual circumstances, tax legislation and regulation which are subject to change in the future.