Divorce is not without its financial cost at any age, but what impact does it have on your plans for retirement?
According to the Office for National Statistics (ONS), the average (mean) age at divorce in 2015 (the latest data available) was just under 46 for men and 43.5 for women. Divorce is at its highest for both sexes between the ages of 40 and 49, while in recent years, marriage lasts an average (median) of just under 12 years.
For many couples, this means divorce happens at the time in life when they should be starting to think seriously about long term financial planning for the future, and it can have a big impact.
Divorce is an expensive process, where even a straightforward, amicable divorce can lead to a bill of several thousands of pounds in legal fees. This is without considering how the divorcing couple’s assets, like the family home and joint savings, will be separated. But in the negotiations over how assets should be split, it’s important not to overlook pensions.
Using pensions as an asset in divorce
Before a couple can know just how much they will receive from a split pension a valuation is needed. Valuing a pension is a complex process, with many factors to take into account.
Valuations 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.
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.
Ways of splitting a pension
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, this could be some or all of the tax-free lump sum or a proportion of the expected pension income. This route provides less certainty that you will receive your full entitlement. The receiving party also loses their entitlement to receive monthly payments if they marry again.
Recent figures from the ONS also show that while divorce in general is in decline in England and Wales, divorce among older people is actually rising.
The ONS found that between 2004 and 2014, the number of brides and grooms aged 65 and over rose by 46%. While part of this is because the number of people aged 65 and over grew by 20% over the same period, it said there was still an increase in divorce for both sexes in this age group since 2009.
Of those marrying aged 65 and over in 2014, almost all had been previously married, with just 8% getting hitched for the first time.
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.
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 should it ever be needed, you will be thankful that you prepared one to reduce the emotional and financial cost of a second dispute about your assets
Don’t forget to update your Will
Unless made specifically with future marriage in mind, getting married revokes any Will you may have in place. If you have made a Will leaving all your worldly goods to the children of a previous marriage, if you remarry and do not make another testament your estate will be distributed according to the rules of intestacy.
This could mean that earlier promises could be unintentionally broken, and those you wish to have your assets after you are gone could get nothing.
If you and your new spouse make mirror Wills, leaving the assets of each partner to the surviving partner and then, on the second death, sharing the remaining assets between the respective children of the first marriages, remember that after the death of the first partner the survivor could change his or her Will, cutting your own children out.
Take legal advice to ensure that your Will is written in such a way – perhaps by use of a trust – that your wishes will in fact be carried out.
Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.