PENSIONS AND DIVORCE

Overlooking pensions when dividing assets could result in financial hardship in retirement.

It is quite likely that the UK is going to experience a spike in divorces as a consequence of the pandemic and an incoming change in law to allow quicker splits.

Lockdown put a huge strain on many couples for a number of reasons with arguably too much time together, and more time to reflect on life and what’s really important.

The number of divorces finalised in the first three months of 2021 was 2% higher than for the same period in 2020 – which was itself a record year for marriage break-ups. There were 30,171 divorces finalised in England and Wales in the first quarter of the year [1].

At the same time the “no-fault” divorce is on its way – though later than first billed – paving the way for more streamlined and faster break-ups. It was due to become law this year but has now been put back to April 2022. On top of this, there is now an online process for applying for divorce, reducing the barriers – and time taken – to starting proceedings.

The danger is with a growing focus on speedy, DIY divorces, that more complex tasks involved with dividing assets will fall by the wayside.

Pensions are already largely overlooked, with many couples wrongly focusing on splitting the family home.

While a higher priority may be given to a more tangible asset such as the bricks and mortar around them, a pension pot could actually be far more valuable.

By skipping the seemingly daunting task of dividing pensions, you risk being in financial difficulty in later life. This is a worry for women in particular who are already at a disadvantage when it comes to pension provision. The gender pay gap and the fact women are traditionally the ones to take time out of their career and raise a family are just two of a number of factors that get in the way of women saving for retirement as much as men.

The message is clear to divorcing couples – factor in pensions from the very beginning.

When it comes to splitting pension pots, there are typically three options:

1. Pension sharing is the most common as it provides a clean break between parties. The Court will issue a pension sharing order (PSO) stating how much of the pension, the ex-spouse or partner is entitled to receive, and each party can decide what to do with their share independently.If you are already drawing a pension when you get divorced, this can be shared too – but tax–free cash cannot be taken by the spouse in receipt of the pension share.

2. There’s also the option to “offset”, where you balance the value of the pension against another asset. For example, your ex might keep all of their pension fund, and as a trade-off you get more of a share, or all of the family home.It is sometimes the only viable option, if, for example, the main carer of any children wants to remain in the family home and there are few or no other assets apart from the pension.

While this can be a reasonably straightforward option, tax matters mean that comparing the value of the family home and the pension pot is tricky. Income from a pension is taxable, while there is usually no tax liabilities when you sell the family home.

3. The third option is to seek a pension attachment order. Under this order a percentage of your pension that you get, each week or month, is paid to your ex, or a percentage of theirs is paid to you.

Getting pensions valued is an important task when dividing assets, but it’s not just about obtaining the cash transfer value. You need to factor in other benefits attached to workplace pensions, for example, which are not always easy to value in pounds and pence.

One thing is clear on this issue – advice is crucial to ensure the right decisions are made for all the family. A financial adviser who specialises in pensions on divorce can help on how best to share out retirement savings.

Getting the right advice can make a huge difference to your future when you want to stop work. It is likely to be time and money well spent.