In a divorce, the pension can be the highest value asset after the family home, making it important to understand the options before you decide what’s best for you.
Here’s everything you need to know.
How are pensions split in a divorce?
There is often the preconception that pensions are split 50/50 during a divorce, but this isn’t always the case. The objective of a court, when looking at the finances involved, is to reach a fair outcome for both parties.
To reach the final outcome, the court will consider the particular circumstances of your case, specifically:
- whether the split of assets meet the needs of any children and your ex-spouse
- whether there has been an unequal financial contribution to the marriage
- how long the marriage was
- the value of the respective pensions
- how close you and your ex-spouse are to retirement.
There are three main ways that pensions are dealt with.
First is offsetting, which means you keep your pension in return for giving your ex-spouse a greater share of other capital assets.
Second is pension sharing, in which a percentage of a pension pot is transferred to your ex-spouse, taking into account some of the circumstances listed above.
Third is earmarking. This means that the pension still belongs to the scheme member (you), but that you’ll have to make some form of payment to your former spouse when your benefits become payable.
The importance of a financial planner during divorce
Solicitors will often encourage you to commission an actuary’s report to see how your pension will split as part of a divorce; that’s an important stage, but it doesn’t cover everything from a financial planning perspective.
It’s therefore equally important to engage with a financial planner and adviser so you can understand what your divorce means for your pension, capital assets and eventual retirement.
If you’re sacrificing some of your pension in a divorce settlement, you should also be reevaluating your retirement plan to ensure you get to enjoy your later years the way you want.
Pension planning after divorce
Often after a divorce, both sides will need to reassess their retirement plans and how much they need to live the retirement they want.
So, start out by working out how much you need to live on when you retire, and how much you’d like to have – including your state pension.
Planning your finances for the future can be tough. Some of your living costs might be lower than when you’re working, but others, such as fuel bills, might be higher.
Then there’s your lifestyle, what you want to do in your retirement and whether you have to pay rent or a mortgage.
You also need to bear in mind things that are less easy to predict. There’s the possibility of having to pay for social care, for instance, while inflation, even at a constant 2%, will mean prices double every 35 years or so.
Once you’ve worked out what you need to save, you need to create a management plan that allows you to do so efficiently without compromising your day-to-day finances. That might include ISAs or a workplace pension scheme – and should absolutely involve making use of pension relief.
We’re financial planners with years of experience helping people like you plan for their retirement. Contact us to find out how we can help you.