Pension Awareness Week: Dividing your pension in divorce
This year, Pension Awareness Week (11-15 September) marks 10 years of helping people make the most of their pension. As well as offering resources to help you understand more about pensions, this week serves as a good opportunity to explore the options you can consider for your pension in the context of divorce.
Even though a pension is likely to be the most valuable matrimonial asset you possess, it is frequently neglected in divorce proceedings. This can be a significant oversight, as dividing a pension fairly is particularly important where one person has contributed financially to the marriage and the other has contributed domestically. So, there are three main options when it comes to dividing your pensions in a divorce settlement.
- Pension sharing – this is where the spouses’ pension(s) are divided into two separate pots, so that each spouse is left with their own retirement income, meaning that pension sharing is often seen as the easiest way of achieving a ‘clean break’ in a divorce. Pension sharing also allows the parties to move forward with an understanding of exactly how much they have for retirement, therefore making financial planning easier. There are disadvantages to this approach, however; requiring a pension sharing order from the court can be a more complicated arrangement and this approach may also incur additional costs (for example, if the pension needs to be transferred).
- Pension attachment order – also known as earmarking, this arrangement pays out a percentage of one spouse’s pension income (or a lump sum) to the other when they start taking their pension. While this means that the pension will not need to be split and transferred, there are downsides to this approach. The person paying out from their pension will pay all the tax due on the income, even though their ex-spouse will be taking a percentage. Meanwhile, the person receiving the income has no control over when they receive it. This means that they could be disadvantaged financially if their ex-spouse delays taking their pension. A pension attachment order also keeps the spouses financially tied to one another, so this option does not provide a clean break that many going through a divorce might be looking for.
- Pension offsetting – this is where the pension holder retains their pension in exchange for other assets. While it can be an effective way of achieving a clean financial break, we highly recommend seeking financial advice to ensure you understand how this could affect your financial future. While keeping the family home or a larger portion of your joint savings and investments may be more beneficial in the short term, giving up your right to your ex-spouse’s pension could leave you financially vulnerable later in life.
Financial advice is key
The division of assets in a divorce can be complex. With so many different options for funding a divorce settlement, how do you ensure that the outcome will deliver long-term financial security for yourself and any children?
It is crucial to take financial advice before, during and after your divorce. A professional financial adviser can help you understand what any proposed settlement will deliver across your lifetime, so that you can move forward in the strongest possible financial position.
We wrote about the key considerations when tackling divorce earlier this year, which you can read here.
If you are thinking about this subject and would like to speak to a member of 7IM for advice before making any financial decisions, please do get in touch with us at email@example.com, or contact your 7IM Financial Planning or Private Client Director.