Getting divorced is never easy, especially when the time comes to start dividing assets.
Keeping a clear head can be difficult with the amount of stress and emotional turmoil involved. The house, the kids, personal possessions and even pets are usually top of the list of priorities when couples start the complex discussions on who gets what after the split.
Yet pensions – which can be the most valuable assets and worth much more than the marital home – are often completely overlooked in divorce settlements, particularly by women.
Women Losing Out
According to the Office for National Statistics:
- Almost half of women (48%) have no idea what happens to pensions when a couple gets divorced, which may explain why so few couples consider them as part of a settlement
- A fifth (22%) presume each partner keeps their own pension
- 15% believe they are split 50/50, no matter what the circumstances
Power of Pensions Overlooked
This research shows that:
- More than half of married people (56%) would fight for a fair share of any jointly owned property
- 36% would want to split their combined savings
- Yet fewer than one in ten (9%) claim they want a fair share of pensions, despite the average married couple’s retirement pot totalling £132k – that’s more than five times the average UK salary (£26k)
Even if pensions are discussed during a divorce settlement, women are still missing out:
- 16% lost access to any pension pot when they split with their partner
- 10% were left relying completely on the State Pension.
Taking Pensions into Account
All pension assets – including any pensions already being paid and benefits that have built up – should be considered when a couple decides to divorce or dissolve their registered civil partnership.
Pension funds – except for the basic State Pension – can then be split, for example, or the value used to offset against other assets in a settlement.
The courts have long had the power to take pensions into account in dividing up matrimonial assets. There is a duty on both parties in a divorce to fully disclose their assets – including any pensions.
The True Value of Pensions
It is important to get accurate and independent valuations of any pension pots. These will be based on what your pension would be worth if you moved it elsewhere. Typically, the total will be below the current fund value because any charges or penalties for transferring out of the scheme will be included.
- If you live in England, Northern Ireland or Wales, you will need to obtain a statement that gives you the cash equivalent transfer value.
- If you live in Scotland, your pension value will be based on what was paid in after you married or entered into a civil partnership, up to the date of separation.
Dividing Your Pensions
Once you’ve obtained the value of all your pensions, you need to think about how you will divide them.
There is no automatic entitlement to pension sharing. Many people mistakenly believe that because they have been married, they are entitled to half of everything – including the pension. That is not the case.
Dealing with Pensions in Divorce
Pensions can be dealt with in several ways when couples decide to divorce:
- Pension sharing
Divorce courts can and often do order a pension to be shared when considering financial arrangements.
When a pension is divided or shared, this does not mean that you will receive a cash lump sum – although in certain circumstances where the recipient is over retirement age, that can be the case. A pension, or part of a pension, that is ordered from one party to another remains a pension and must be invested in a pension plan.
- Pension offsetting
This means the pension fund value is ‘offset’ against other matrimonial assets, such as the house. It needs to be handled extremely carefully due to the different nature of capital assets and pensions. Pensions are not liquid assets. They can only be turned into cash at retirement.
If you choose this option, your ex-partner could be awarded a larger share of the property in return for you keeping your pension. However, they will have to make their own retirement arrangements. If they’re close to retirement and haven’t made any pension arrangements of their own, they may not agree to offsetting.
- Pension earmarking
Pension earmarking means one of you receives a lump sum or income from the other person’s pension when they start to draw on it. However, the pension holder may decide not to take their pension straight away or carry on working, leaving the other person without a retirement income.
If you’re dependent on pension earmarking and you remarry, you will lose your right to carry on receiving the pension – and if your ex dies, your income is likely to stop.
- Deferred lump sum
With this option, you receive a lump sum when the pension holder retires. This is not available in Scotland.
- Deferred pension sharing
If your ex is below the age at which they can draw on their pension and you are already receiving one, you can ask the court to make a Deferred Pension Sharing Order. This allows you to receive an unreduced pension until they reach the age at which they can start to receive a pension too. This option is not available in Scotland.
If you’re retired, you can still split pensions if your ex has already retired. However, it won’t be possible to take a tax-free lump sum from their pension – even if they did.
Divorce and pensions are significant and complex but can be made significantly easier with the right advice. If you would like to discuss your personal situation and the financial options available to you, please get in touch with us today.