Divorce and Pension: Why forfeiting pension money in divorce could be a mistake

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February 11, 2021 - Paul Fazackerley

Emotions can run high when a marriage or civil partnership comes to an end. If you are facing divorce, then understanding how valuable pensions are in that conversation is extremely important.

Pensions are often one of the most valuable savings pots grown during a marriage. Those who divorce later in life can often hold sizeable pension savings, and in some cases they might be as large as the value of a home.

Yet when it comes to divorce, how to split and share pension money often falls down the list of priorities. Couples facing the exhausting process of divorce may look for the fastest and easiest exit. But agreeing to forfeit thousands of pounds in pension cash in order to keep a split amicable and to settle quickly could be a mistake that could have an immediate effect on long-term wealth.

Whilst a solicitor will protect and guide you on how financial assets should be split, it is a good idea to understand the importance of pensions in a divorce and have a practical understanding of how pension savings or a retirement income that has already been drawn can be divided.

How is pension money shared?

When you divorce, both parties have to disclose to the courts all of their financial assets in order to come to a fair settlement. This means including any pensions currently held or any pension income currently being received.

All pensions are considered, regardless of their size and when they were accumulated, even if they were accumulated before you were married (unless you live in Scotland). If not agreed in advance with your respective solicitors, the courts will decide how much money each party should receive.

The pension accounts that can be considered for sharing between you and your spouse include privately saved pensions, such as workplace or personal pensions, and any current pension income being drawn.

Your basic state pension can’t be shared. If you have an additional state pension or a state pension top-up income, the court could order that this is shared.

Practical options for splitting pension money

There are various options when it comes to splitting pension assets, they fall into two main categories of offsetting or pension sharing. It is also possible to use a mixture of both approaches in a divorce agreement.

Pension sharing

Pension sharing allows the full amount or a proportion of any existing pension to be transferred to you. The money is transferred into an existing pension scheme in your own name, or if you don’t have a personal pension you can start a new one. Pension sharing this way provides a clean break and a fresh start, and because of this, it is a popular way to split pension assets.

Deferred pension sharing

Not all couples reach retirement age at the same time. If your spouse is already drawing a retirement income, but you are too young to start taking a pension income, then deferred sharing can offer the solution. This involves a written agreement that pension monies will be shared at a later date, specified in a divorce agreement. This option is not available to those living in Scotland.

Deferred lump sum sharing

You could choose the deferred lump sum option, which means you get a lump sum payment from your ex-partner’s pension when they retire. However, your partner will have the right to chose their retirement date. This option is not available in Scotland.

Pension offsetting

Pension offsetting allows you to offset the value of any pensions against other assets. This is a very valuable tool in situations where a couple think they can’t afford to divorce. In some cases this option could allow one person to keep a property asset in return for the other person keeping their whole pension.

Pension attachment/earmarking

A pension attachment order allows you to get a proportion of your spouse’s pension income when it starts getting paid. The share can be the pension income, the lump sum or both. You’ll need to wait until your ex-partner claims their pension for this.

The next steps

Whilst dividing pension money can seem complicated, a good solicitor and financial adviser can help. Sharing money planned for retirement fairly is crucial to ensure you, as well as your spouse, have the equal opportunity for a secure financial future.

Once a divorce settlement has been agreed, your financial adviser can help you to set up a new pension plan to take receipt of funds and help you to review your new retirement plan. An advisor can also help you with other complicated aspects of a divorce process, such as renegotiating a mortgage, reviewing investments, transferring or buying new life insurance policies and so on.

Working with your solicitor and your financial adviser can help you to rebuild your financial plans and arrangements as you look to build your new life. To find out more about divorce and pensions, call Furnley House on 0116 269 6311 or email info@furnleyhouse.co.uk

 

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Our blog is for your general interest. Whether or not it applies to your current financial position, please feel free to share it with friends, family, or colleagues who may be interested.