With over 113,000 divorces in 2021 and pensions being the largest asset for households aged between 55 and State Pension age (according to the Office of National Statistics – ONS), pensions in divorce proceedings are a topic that can have a significant impact on the final financial settlement for couples. Here are some considerations for pensions when getting a divorce.
It is important that both parties in a divorce or separation receive a suitable share of the pension assets. This should be done while taking into account any existing financial arrangements, such as assets owned before or after the marriage. It’s best to get separate financial advice and legal advice so that both parties get the best possible outcome. Before you agree to a final settlement, make sure that all costs and charges are split between the parties fairly.
Split the pension assets fairly and equitably: This means that each party should take a suitable share of the pension assets, taking into consideration any existing financial arrangements, such as pre- and post-marital assets.
Consider the tax implications of the pension division: Depending on the type of pension division chosen, there may be tax implications to consider, which will impact the fair and equitable split of assets.
Agree on the form of pension division, e.g. pension sharing, offsetting or earmarking: These are the three main forms of pension division when getting a divorce. Pension sharing involves the division of a pension scheme into two separate funds, while offsetting involves the division of other assets as compensation for pension assets and earmarking involves awarding a percentage of the pension to one party.
Consider the impact of early retirement on the pension assets: Early retirement can have a major impact on the amount of money that can be taken from the pension. It is important to consider this before making a decision.
Understand the individual pension provider’s rules and policies: Every pension provider could have different rules when it comes to pension division, this could even be different depending on the type of pension contract with the same pension provider. It is important to understand these rules before making a decision.
Consider the impact of inflation on the pension assets: Inflation can have a major impact on the value of pension assets, so it is important to factor this into the decision-making process. For example, a low risk investor is likely to be more susceptible to inflation than a high risk investor.
Consider any restrictions on the pension assets: Some pension schemes may have restrictions on how the assets can be accessed, such as early retirement. It is important to consider these restrictions before making a decision. In addition, be aware of any scheme specific benefits that you could be giving up, for example, protected tax free cash, GMP, Guaranteed Annuity Rates or discounts for fees and charges.
If you or someone you know is dealing with a divorce and need assistance with financial planning, do not hesitate to reach out. Our team of financial advisers are here to help. Give us a call on 01883 332 261 or send us an email at jonathan.bertrand@wingatefp.com and we will be glad to help you navigate this difficult time.
