Divorce and pensions: understanding your options
Why is it important to consider your pension and finances when you divorce?
Pensions are often the second most valuable asset in many marriages, after the family home. Yet they are often missed out of divorce settlements, or not taken fully into account when working out a fair and equitable deal for both parties.
I asked James Cridland of Coleridge Wealth Management to explain why is is so important to consider your pension as part of your financial settlement on divorce.
Pensions are often the second most valuable asset in many marriages, after the family home. Yet they are often missed out of divorce settlements, or not taken fully into account when working out a fair and equitable deal for both parties.
One of the problems is that it can be difficult to quantify their value. If the pension is a final salary scheme, you will need to contact the trustees running the scheme to obtain a valuation.
If the pension is a workplace pension that is not final salary, or if it is a personal pension, its value can change with stock market fluctuations. For this reason, if you are divorcing and there are pensions involved, it is important to take proper financial and legal advice. There may also be tax issues involved in splitting a pension.
Why should pensions be split?
When a couple is separating, dividing assets should be fair and equitable. If the person with the pension has built up their fund over many years, the value of the pension could be worth hundreds of thousands of pounds, if not more.
It is not compulsory to split pensions, and some settlements leave the pension out of the arrangement, concentrating only on the family home. However, for anyone who has not built up his or her own pension entitlement over the years, or who has taken time out from work to raise children, there is the risk that they may end up being impoverished in old age.
For the person with the larger pension, it may be possible to structure the settlement as part of wider tax-planning for retirement. If you or your spouse have a large pension, then it is particularly important to get financial advice about how best to divide it up.
How does the court decide how to split a pension?
Courts have the power to order the sale or transfer of property, lump-sum settlements, or maintenance to be paid regularly.
They can also make a pension sharing order (PSO). This is a way of legally dividing up a pension after divorce or the end of a civil partnership.
The court can consider any pension that your spouse has – including your final salary (defined benefit) pension, workplace defined contribution (money purchase) pension, private pension, stakeholder pension or SIPP (self-invested personal pension) and potentially some of the State Pension.
A pension cannot be split unless a couple are married or in a civil partnership. When you agree a financial divorce settlement, you will need a consent order confirming it. Without this consent order, both spouses can make a claim on their partner’s pension later on, even if they have been divorced for many years.
How are pensions valued?
There are different ways of working out the value of a pension, depending on what type it is:
A workplace defined contribution pension will have the transfer value included in the annual statement. You can also ask the scheme administrators for an up-to-date transfer value.
A final salary scheme will be more complicated, so you may need to take financial advice in order to obtain a value.
If you have a public sector pension scheme, you will also need to take advice, as its value will be based on how much you paid in and how long you have had the pension for.
A personal pension or SIPP will have an up-to-date value, based on the underlying asset allocation. It may increase or decrease in value depending on the value of shares in the stock market at the time it is being assessed.
Once the court has assessed the value of the pension, it will decide how much to award. This lump sum will then be transferred to the partner so that they can pay into an existing pension or set up a new one. Sorting out pensions for a financial settlement in divorce can take many months.
What form does a settlement take?
When a marriage or civil partnership ends, the pension may be included in the final settlement in several different ways:
Pension sharing: the pension is divided up and one spouse receives a share of their partner’s pension pot.
Pension offsetting: the pension value is offset against other marital assets, such as the home or other property.
Pension earmarking: some of the pension is paid by one spouse to another. This used to be available as an option in England and Wales but is now only available in Scotland.
What else needs to be taken into consideration?
When the family assets are being divided up, it is important to reach a fair compromise. Sometimes a spouse may regard the ability to stay and live in the family home as a more important consideration than splitting a pension. However, you also need to think about how you will fund your own retirement in that case. If you are divorcing when you are in your 30s or 40s, a pension might seem a long way away, but the decision that you make will have a direct effect on your standard of living in your 60s and beyond.
The path to financial wellbeing is seldom obvious and there is a myriad of financial obstacles along the way. Wherever you are on life’s journey - and whatever the challenges you face - there’s no substitute for simply asking questions and having a plan in place. Therefore, taking professional advice is vital and it's where we can help.
So, give us a shout. Your future self will thank you.
How to get in touch with James:
Check out James’ website, contact him by email at james.cridland@sjpp.co.uk, or by phone on 01275 430024 or 07794 477543.
And check James out on social media: