Separation and pensions

Burnt out candles representing pensions

Pensions

MoneyPlus Features Team

18th January 2016 at 5:29pm

January unfortunately appears to be a busy month for divorce planning going by some current research.

A recent survey of 2,000 spouses by legal firm Irwin Mitchell suggests that 1 in 5 couples plan to divorce after the holidays. Instructions to lawyers to file for divorce are also up 27% so far this month compared with an average month, it found.

And the third Monday of January, or blue Monday as it’s been termed, appears to be the busiest day of all for divorce lawyers, according to family law firm Vardags.

Breaking up is never easy. Divorce is a stressful and demanding time for all parties, along with the heartache involved there’s so many practicalities to take into account. It might be the last thing on your mind, but your pension could be affected by your change in relationship too.

Things to consider

When people consider divorce they often think about the more important things such as the family home, custody of the kids, maintenance – pensions don’t necessarily make the list. As your pension can actually be one of the largest assets you have – it could be worth even more than your home – then it should become a major consideration in your divorce settlement.

Couples that don’t prepare for this can find that their expected pension benefits are significantly different once they divorce.

Your pension options

You can split pensions several ways, so it’s worth understanding the options before deciding what’s best for you.

  • Pension sharing– the pension is split at the time of divorce or dissolution so that you each receive a separate pension pot and can continue to build pension benefits for the future. This allows the partners to make a clean break. An agreed portion of the pension value is transferred to a new pension plan on behalf of the ex-partner.
  • Pension offsetting– you each keep your own pension benefits but adjust the proportion of other assets to take account of the value of the pension benefits. One partner’s pension is “traded” against other assets to an agreed value.
  • Pension earmarking– arranging that when one person’s pension benefits start to be drawn down, part of them will be paid to the other person.

Earmarking is probably the most complicated of the three we’ve highlighted, it means an ex-partner will have to wait for their former partner to retire before receiving any money, they could risk the value deflating over time due to poor investments, also the earmarked potion may be lost if the pension holder dies before retirement.

And with the introduction of new pension freedoms in April 2015 things got a bit more complicated, as there is now a danger a divorcee could be left without a nest egg if their former spouse chooses to empty their pension pot.

If divorce is on the horizon, then pension settlement should really be pushed up the priority list.

The Pension Advisory Service provides some valuable information on all the three options listed, and it’s worth visiting their site to find out more.

Take advice

If you decide that divorce or the dissolution of a civil partnership is the right course of action for you, seek specialist advice from your solicitor to protect your interests. And where a pension is involved, the advice of an independent financial advisor can help in the valuation and placement of the affected pension too.

Join the conversation and follow us on twitter @StandardLifeUK and Facebook.

The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. The information here is based on our understanding in January 2016.