Breaking up is hard to do
It’s an unfortunate fact of life that four in ten marriages end in divorce, with one in three lasting less than 20 years. Ending a marriage and going through a divorce can be a stressful, difficult time, with many difficult decisions to be made – often in less than ideal circumstances.
Planning for retirement can be far from the highest priority when put alongside the many issues to be dealt with during a divorce, such as custody arrangements for any children and splitting assets like a family home and possessions. But if you are going through a divorce, do not underestimate or discount the value of a spouse or partner’s pension arrangements.
“Pensions are often the most valuable asset a person will acquire during their lifetime,” says Julian Hawkhead, a family lawyer with law firm Stowe Family Law LLP. “If you are going through a divorce and you or your spouse has a pension, don’t disregard it immediately. People often disregard a pension as it’s not cash in hand right now, but rather an asset for the future.”
Splitting a pension
Pension assets are treated in much the same way as other assets in divorce. “Irrespective of the grounds for divorce – whether that’s infidelity or separation for at least two years – they don’t affect the financial outcome,” says Hawkhead.
There are three main ways a pension may be shared between the separating couple – these examples assume you are sharing your pension with your ex-partner:
The transfer value – basically, the equivalent cash balance in the scheme that you have built up – is calculated and your ex-partner receives a percentage of the total. This sum or “pension credit” is transferred out into their own pension scheme. The advantage of this method of dealing with your pension is that it means the two funds are separated so that each party has an absolute right to their own pension and each fund can continue to grow with further contributions independent of the other party’s pension.
The value of your pension is negotiated or offset against the value of other assets being contested in the divorce. For example, you might get to keep your entire pension in exchange for giving up a claim to other assets, such as a share of the family home.
Pension attachment (“earmarking”)
A percentage of your pension benefits are allocated to your ex-spouse for example in terms of the tax free lump sum and the pension income. This route is not as popular since Pension Sharing became possible as they provide less certainty that you will receive your full entitlement. The receiving party for example loses their entitlement to receive monthly payments if they marry again.
Issues to consider
Valuing a pension can be a tricky process with lots of complex factors to take into account, and can vary from scheme to scheme. It is not uncommon for divorce lawyers to bring in their own actuaries or specialist financial advisors to double-check the figures they are presented with.
“In some cases, the face value presented by schemes may not be its fair value,” says Hawkhead. Comparing one pension and its benefits against another pension may require the input of a pensions adviser. “It’s a complex area and often requires investigation to question the values that you’re given.”
There may also be cases where one party may have accrued a significant amount of their pension prior to marriage, in which case it may be arguable that the pre-marital pension should be excluded when looking at the assets that should be divided.
In other cases, pension entitlements may form a significant part of a divorcing party’s assets – such as public sector workers, who mostly still enjoy defined benefit, often more commonly known as final salary pensions. In these cases, where pension entitlements are better than average, pensions can be hotly contested.
Remarriage and divorce
Around a third of second marriages end in divorce, according to a report by the Marriage Foundation, a think tank. In situations where someone were to remarry and later divorce, measures like pension sharing are available, although there may be other things to consider first.
“If you’re looking at wider issues, then you have to consider any dependent beneficiaries – for example children from a first marriage,” says Hawkhead. “You would want to make provision for children in the event of death, so you have to decide how to divide your resources across your new spouse and dependents.”
Having been through a divorce, you may also feel like ‘once bitten twice shy’ and look to take steps to protect your finances going into any future relationship.
“You should give serious consideration to preparing a prenuptial agreement to preserve the assets that you bring to the marriage,” says Hawkhead. “It isn’t romantic but you should see it as a type of insurance policy that hopefully you can file away and never need, but you will be thankful that you prepared one to reduce the emotional and financial cost of a second dispute about your assets.”
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.
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