Divorce is one of the most difficult subjects to talk about. The emotional upheaval of divorce can be difficult to deal with. So too can the financial implications.
When relationships end, there are so many things to consider. Children, home, and support are the first things you focus on.
When you begin the process of separating a shared life, the sheer number of things to deal with is daunting. The settlement may come with financial pressures. This can have a lasting impact on your plans for later in life.
A study from Research Plus [1] shows that divorcees retiring in 2018 expected to get up to 18% less in retirement income. As divorce rates are increasing for men and women over 55[2], it is an issue likely to affect a growing number of the baby-boomer generation.
One of the most difficult assets to split
Divorcing spouses are often unaware of their rights. They are usually less aware of how to begin to approach the issue of a fair split of pension assets. It will not be the first thing you need to think about. There will be more immediate priorities like living arrangements and childcare. A pension fund and income in retirement should also be a priority.
A pension fund is likely to be one of the most difficult assets to split when divorcing. Because of this, it is best to start looking at what to do early.
Advice is crucial as early as possible in any separation
A pension fund is one of the most complex assets a couple will have to split. Anyone going through a divorce should seek legal and professional financial advice to help them do so. For many more couples, the increase in the value of pensions means that it is often the largest asset.
Taking legal advice in the initial stages of separation is important.
Before planning how to separate your pension assets, you should work out how much you will need to live on later in life. It is never easy when things come to an end, but support and advice can make this clearer.
The options available when separating your pension assets
Once you know the different pensions you and your ex-civil partner or spouse have, you can start exploring the options. Across the UK, there are three core options to consider when you are separating pension assets. These are pension sharing orders, pension attachment orders (called ‘pension earmarking’ in Scotland) and pension offsetting. Some may be better than others for you.
A pension sharing is one of the options available on divorce or the dissolution of a registered civil partnership. Each party owns a share of the pension fund but can decide what to do with their share independently. This provides a clean break between parties, as both parties have a separate pension plan.
Pension attachment orders redirect some or all of the pension benefits to you or your ex-civil partner or spouse at the time of payment. When the person who owns the pension receives their benefits, the pension provider makes a payment to their ex-civil partner or spouse. With this option, you don’t get the clean break as you would from the pension sharing order.
With pension offsetting, the total assets are considered and then divided up. For example, if your ex-partner has a large pension pot, they may keep this as you may agree to receive an asset of similar value (the house, for example). This may be an appropriate option if there are overseas pension assets that need to be split, as a UK court order cannot share these.
When contemplating divorce, many people put themselves under undue stress worrying about their financial well-being. Much of that stress is due to the fear of the unknown before, during and after divorce. It is important to focus on your financial situation realistically, since doing so will give you a sense of control over your life, which in turn can reduce your stress level.
A divorce is never something people plan, but it should be something to plan for. There are so many assets to consider and so much legislation to understand. If you are considering a divorce and want to know more about the options available to you regarding your finances, please feel free to get in touch.
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[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9,896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.
[2] Divorce statistics from the Office of National Statistics, published 26 September 2018
