If you’re going through a divorce, your pension and retirement are likely the last things on your mind. And yet the decisions you make during the divorce process can have a lifelong impact.
Despite pensions often being one of the largest assets we have, you may overlook them when dividing assets. Just 12% of people getting divorced considered pensions, according to Legal and General research. That’s far below the 50% that consider their family home.
It’s easy to see why this is the case. Other assets may be tangible, like your home or material items, or readily accessible, like your savings account. In contrast, you may not be able to access your pension for many years.
In many cases, people aren’t sure what the value of their partner’s pension is either. This can lead to divorcees undervaluing retirement savings. According to a survey for interactive investor, 38% of Brits in a relationship do not know how much is in their partner’s pension. This compares to 14% that “definitely know” and 31% that “know roughly”.
Whether retirement is around the corner or decades away, you should consider pensions when divorcing. As well as the value of pensions, you also need to consider how they can be split. Usually, you have three options and it’s important to consider the long-term impact of each.
1. Pension earmarking
Pension earmarking, also known as a “pension attachment”, is falling in use as they keep your finances tied to your partner’s. However, it’s an option that’s worth considering and it can be useful in some circumstances, such as if one of you has a defined benefit pension.
Pension earmarking gives one partner a portion of the other’s pension. The pension benefits become available when the person holding the pension starts to draw from it, and the amount awarded can either be a set figure or a percentage.
If you live in England, Wales or Northern Ireland, the pension can provide a regular income or a lump sum. In Scotland, it must be given as a lump sum.
While this type of pension order can be useful, one drawback is that your finances remain linked. If you are awarded a portion of your ex’s pension, but they don’t access their pension when you expect, it could have a huge impact on your own plans and financial security.
2. Pension sharing
Pension Sharing Orders (PSO) were introduced in 2000. They are more commonly used than pension earmarking as they allow couples to make a clean financial break.
A PSO may award a portion of one party’s pension to the other if they have no pension or their pension has a lower value. This is known as a “pension credit”. Rather than having this money tied to an ex-spouse, you can transfer a pension credit into an existing or new pension.
When a PSO is used, both parties should carefully consider the impact.
If it means some of your pension has been given to a partner, you should assess whether you’re still on track to meet retirement goals. Taking a lump sum out of a pension can have a significant impact, especially when you consider potential investment growth. A review now means you can take steps to ensure you’re still able to meet your goals.
If you receive a part of your partner’s pension, you’ll need to decide where to transfer the pension credit to. This should be linked to your wider financial plan and retirement goals.
3. Pension offsetting
Finally, pension offsetting means both parties keep their pensions intact. Instead, other assets are divided to balance the difference between pension values. For instance, the person with a lower pension value may choose to take a larger share of property wealth.
One of the challenges with pension offsetting is assessing the value of the pension and how this relates to other assets.
With this option, the couple can make a clean financial break. However, you will still need to consider the long-term impact it will have on financial security in retirement.
You will also need to think about the short- and medium-term. If, for example, you’ve kept your pension intact but have taken less property wealth, will you need to take on a larger mortgage?
Please get in touch if you’d like to discuss how assets can be divided during a divorce and what the outcome could mean for you. We’re here to provide financial confidence as you start the next chapter of your life.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.