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Pensions are often neglected in divorce settlements despite their value to both spouses as a joint asset in the marriage.
What happens with home sharing is often a priority, for immediate practical reasons, especially if a couple has children.
“No-fault” divorce legislation introduced in spring 2022 has made separation easier and quicker, but critics say the new emphasis on haste means many ex-spouses could be left worse off as a result.
How do “no-fault” home divorces work?
Couples can divorce within six months of first filing, even if one partner objects, and the process is largely done online, including the delivery of divorce papers by email.
But financial arrangements covering assets, including pensions, are still dealt with in a separate, parallel process, which can continue after the divorce is final.
“Pensions are increasingly an important issue in divorces, but for the growing number of older couples divorcing, private pensions are often the most valuable asset after the family home,” says Lynne Cowley, partner at the law firm Nockolds.
However, he warns: ‘With more and more people divorcing on their own online, the chances of making a pension mistake increase.
‘Divorcing couples may put too much emphasis on the home and overlook the other spouse’s pension.
‘This can be financially disastrous for someone with little or no retirement provisions. If a spouse has set up even a modest final salary pension scheme, there is a good chance it will be worth considerably more than the average UK house.
Experts say there are three main options when it comes to pensions in a divorce: share them cleanly, have one partner allocate part of the income to pay an ex-spouse after retirement, and offset its value against other assets.
Below we look at the pros and cons of each and go over some additional tips on what to do and how to avoid the worst pitfalls when splitting pensions.
Divorce? Find out how to avoid the worst pitfalls when splitting pensions
1. Share pensions
The pension is divided into two separate funds immediately after the divorce. Each ex-spouse takes a share, which they themselves control from that moment on.
This allows for a clean break and ensures neither of you are left in the worst possible position when it comes to generating retirement income, says Sarah Coles, head of personal finance at Hargreaves Lansdown.
But she says the downside is that it can be relatively complicated and requires a court alimony division order, which will set out how the alimony should be divided.
‘It may make sense to get financial advice to improve your chances of getting a fair split. You may also need further advice if the pension needs to be transferred and to rebuild your retirement savings. This will come at a cost,” says Coles.
“This leaves both partners with work to do to rebuild their pension.”
Lynne Cowley, partner at Nockolds, says: ‘The benefit of a pension sharing order is that the fund is divided immediately between the spouses, meaning the applicant knows what goes into their pension fund now and can plan for the future. .
“People need to think carefully about whether pension attachment or a pension sharing order is the most appropriate remedy.”
2. Order to seize or affect the pension
A percentage of a person’s future pension income and lump sum retirement sum is paid to their ex-spouse when they start collecting their pension.
Coles says this allows for pension sharing, so no one needs to start from scratch, but it must be ordered by the court, which comes at a cost.
‘It is not a clean break, because essentially it is maintenance paid out of the pension. “All taxes are paid by the person receiving the pension, even when part of the income is received by their ex,” he says.
‘The person who doesn’t have the pension has no control over when they will receive the benefits, so their ex may delay receiving them.
‘They can also stop contributing to that pension and accumulate savings elsewhere. And when they die, they will stop paying their ex’s alimony.
Cowley warns: ‘In many cases, a pension attachment order may not be the most appropriate remedy. This is because the order does not prevent a person from transferring money from their pension or force them to continue paying, so unless the pension is already withdrawn it may be ineffective.
“A pension attachment order is risky unless the pension is already in the process of being drawn down and it is important to look at exactly what benefits the type of pension offers to avoid losing out if the wrong option is chosen.”
3. Pension compensation
The holder retains a pension and its value is offset by other joint assets.
“It’s a relatively easy way to get a clean break,” says Coles. “This may allow half of the couple to remain in the family home.”
But he adds: “Whoever gives up their right to a pension will have a mountain to climb when it comes to achieving a decent income for retirement.”
What else should you consider? Regional differences
“What can be divided depends on where in the UK you get divorced,” says Menna Cule, head of the Birmingham office of wealth manager RBC Brewin Dolphin.
«In England, Wales and Northern Ireland, the total value of the pensions accumulated by each of them is taken into account, excluding the basic state pension.
‘In Scotland only the value of pensions that you have both accumulated during your marriage or civil partnership is taken into account. Normally, anything accumulated before you got married or after your “separation date” doesn’t count.’
Do you need financial advice?
Not understanding the value of what you have is a trap for people to part with, says Coles.
‘The divorce process involves dividing your assets, so you need to understand the value of it all. Couples often trade off assets, but it’s important to appreciate the value of what you’re giving up and possibly talk to a financial advisor.
“There are a few options to consider, so you want to make sure you choose the best one for your circumstances.”
Ben Glassman, partner and head of family and divorce at wealth manager Evelyn Partners, says it’s important to get financial and legal advice from the beginning, not wait until a divorce settlement is reached.
‘The divorce process can be conflictive but also full of nuances. There are many opportunities for conflict, mistrust and misunderstanding, so it is important to have the right team supporting each party.
‘Independent financial assessments can benefit both divorcing parties and achieve clarity about the true value of the couple’s marital assets.
‘Involving a financial planner from the beginning means they can help shape the divorce settlement to achieve an optimal long-term outcome.
“In particular, the gut reaction is often to keep the family home, but this does not always make financial sense, especially when there are other important assets to consider, such as pensions.”
Have you thought about taxes?
Couples who divide their assets and will have separate incomes after divorce should consider the tax consequences and whether they need help from an accountant, financial advisor or planner.
This is especially the case if it is a large pension. Inheritance tax, income tax and capital gains tax may also be affected by divorce.
> How to find a good accountant? This is how Money’s tax expert explains it
Don’t forget your state pension
This is also important, especially for women, who often have gaps in their career that could affect their state pension entitlement, Glassman says.
“It is important to obtain a projection, especially when seeking to equalize the pension rights of both spouses.”
You can get a state pension provision here and check your National Insurance registration for any gaps here.
Update your ‘expression of wishes’ form with your pension plan
Keep expression of wishes forms up to date with your pension plans, says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
‘You will have completed an expression of wish form to say who you would like to receive your death benefits when you start your pension.
‘However, this may have been a long time ago and in the meantime you may have divorced, separated or entered a new relationship, so the person named on the forms may not be the person you wish to benefit.
‘While administrators/trustees may have discretion in some cases to grant death benefits to someone other than those listed on the form, sometimes they do not. It’s best to make sure they are updated regularly to ensure your wishes are taken into account should the worst happen.’
Are you still married and hoping to never get divorced?
Couples who make pension saving decisions together are more likely to have a richer retirement.
Financial experts say taking a joint approach to pensions makes couples better off in retirement, although there are some potential tax drawbacks and there are circumstances where it makes financial sense to focus on the higher earner’s pension. .
> How couples who save together can maximize their pensions: read eight tips from the experts
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