If pensions had feelings they would no doubt feel neglected, underestimated and probably misunderstood. Against better advice, most of us tend to spend our lives avoiding talking about them, struggling to make sense of what they can offer us and then, when we really need them…well it may be all a bit too late. It may be the jargon – they do tend to be complex – or it may be, we just don’t want to think about the autumn of our lives. But it isn’t just retirement when pensions are important to us. The savings we make play a part in most milestones in our lives. And perhaps one of the least thought about ones is divorce.
Due to the fact that we tend to think of pensions as a resource for later life, they tend to get put on the back-burner and are easily forgotten when totting up what we have in the bank. But your pension fund is an asset. That pot may seem distant in many ways, but it represents your life-time savings. And now with the pension freedoms and pension release, you can even withdraw them, or a part of them, from the age of 55. It’s important to remember, however, that withdrawing pension money early isn’t right for everyone as it will leave you worse off in retirement.
Marriage is all about sharing…and so is divorce apparently. But this time around, to make sure everyone is sharing nicely and no blood is spilled, certain legal orders can be put in place. For instance, if you and your spouse can not reach an amicable agreement you can ask for a court order.
The pensions you and your ex-spouse would need to factor in are any private pensions, workplace pensions and the old additional state pension (not the state pension itself). In England, Northern Ireland and Wales, the total value of the pension is taken into account, whereas in Scotland it is only the value accrued during the marriage or civil partnership which is important.
However, there is a lot of flexibility over how you share the pensions and hopefully ex-spouses do come to some agreement amicably as to which route they will take to minimise stress. An informal agreement can be made, but in all the options listed below there may ultimately need to be a court order in place to make them enforceable. Typical ways to divide up retirement savings are:
At time of divorce this is about both parties looking at their retirement funds and sharing them as equally as possible. This may lead to one party transferring their retirement savings into their ex-spouse’s pension pot or vice-versa.
This could be an option if one partner has already retired and was therefore receiving their pension and the other is younger than retirement age. An arrangement could be made whereby the younger of the two parties takes their share at retirement age. This can be quite complex and a financial adviser or lawyer is recommended.
In this scenario, you would get a lump sum when your ex-spouse reaches retirement age.
The value of the pension is offset against another asset. For instance, the value of your pension would be assessed against the value of the home. The outcome in this instance may be one partner would get a larger share of the financial value of the house and one partner would get the pension.
This is also known as earmarking. Like the deferred lump sum and deferred pension sharing, this prevents a clean break at the time of divorce. A divorce will obviously mean, in most cases, a depletion of overall finances. And you could be envisaging a time when your pension is literally cut in half. So how can you get your retirement savings up to speed again? Clearly you can always increase contributions, but if all your finances are a bit hairy, it may be more viable to streamline the type of pension you have by looking at how it is performing overall, the features it offers and what kind of savings you will need to accrue for your future.
We can help you make the best possible decisions when it comes to your pensions. We are authorised and regulated by the Financial Conduct Authority.