Divorce can take a substantial emotional toll on you but can also have a long-lasting negative impact on your finances.
Separating your assets can be complex. When you divorce pensions are usually included in the financial settlement along with other assets and property. A pension is typically considered a joint asset which means it has to be divided in divorce. Dividing any existing pensions will be one of the biggest financial decisions you need to make as it will have a direct impact on your lifestyle when you retire.
The introduction of workplace pensions means that pensions are becoming one of the most valuable assets in divorce proceedings. Even if you haven’t contributed to a pension, you could be entitled to claiming part of your spouse’s pension.
In many cases, the value of a pension pot may exceed the equity in the family home yet only 9% of people would ask for a fair share of their spouse’s pension pot compared with 56% of people who would fight for an equal share of a jointly owned property (Scottish Widows study, 2017, 5314 participants).
What pensions could my spouse be entitled to?
Your spouse could be entitled to most pension schemes, including a workplace scheme, a SIPP, personal pension, stakeholder scheme, retirement annuity contract. The state pension cannot be shared nor any pension you already received as a spouse.
How will the pension be split?
After your family home, pensions are usually the largest asset that needs to be divided.
The percentage of the pension that will be transferred to your spouse can be calculated using the total pension value or by calculating the regular income that the pension will generate. Unfortunately a 50/50 split of a pension may not provide equal pension income for both people when they retire due to differences in life expectancy and age.
There are three options when splitting a pension:
Pension Earmarking
The pension provider will pay a percentage of the pension to your spouse, this will either be the pension income, a lump sum, and/or any death benefits. Payments will only start when you retire and start taking pension income meaning your spouse is more likely to receive the same benefits from your pension as you. There is no legal transfer of ownership. The payments will stop if the spouse remarries or predeceases you.
Pension Offsetting
Pension Offsetting is offsetting the pension value against other joint assets. This means the right to the pension will remain with the original owner and it will not be split. For example, one partner could choose to keep the family home if it is of equivalent value instead of claiming a share of their spouses pension.
Pension Offsetting is difficult as it is hard to equate the potential future value of a pension compared to the value of an asset today. This is because pensions often grow in value over time due to compound interest and investment growth. However some spouses prefer to have the security of an asset such as a house.
Pension Sharing
Pension Sharing is splitting the pension between the couple at the same time as the divorce and is the easiest way to divide the pension and offers a clean break. You can split the whole pension or just part of it by giving your spouse an agreed percentage of your pension pot. This percentage can be used to set up a pension in your spouse’s own name and can invested in the existing pension scheme (known as an internal transfer) or transferred to a new pension provider (known as an external transfer).
Please note if you have divorced previously and have a pension sharing order in place for your pension, your current spouse cannot share it.
The percentage of your pension that you lose is called a pension debit and the percentage that your spouse receives is called a pension credit.
Find out your pension options
If you are going through a divorce, our experienced financial advisers can help let you know your pension options.
Contact a Financial Adviser at Four Wealth Management today on 0117 973 0500 or email fourwm@sjpp.co.uk to book a no-obligation meeting. The meeting will last approximately one hour and can be conducted on the telephone, at our office in Bristol or at your home address.
