Pension options on divorceJuly 24th, 2013 by Dan Woodruff
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If you are getting divorced then you will probably need to take account of pension assets in your financial settlement. This article explains the 3 main pension options on divorce.
- Pensions can be a difficult asset to assess on divorce
- There are 3 main options:
- Pension offsetting
- Pension earmarking
- Pension sharing
- Practical considerations
- Getting financial advice with pensions and divorce
What happens to assets on divorce?
When you get divorced you will need to make arrangements for your children (if appropriate), and to divide up the assets of the marriage fairly. Often pensions can be one of the largest assets you hold.
You will agreed with your former partner on how to divide up your assets. Read on to find out how you can divide up your pensions on divorce.
The 3 main pension options on divorce
Pension offsetting is the oldest method used with pensions and divorce. You can offset one type of asset against another. For example, if you have a house worth £250,000 and one spouse has pensions worth £250,000 then you might decide to offset one against the other. One spouse could keep their pension finds, and the other the house.
Pension offsetting may be attractive if it is easy for you to divide up the assets, and do not have children to worry about. This option is likely to be used where both parties have their own pension arrangements of a similar value.
If one spouse has far less financial resources than the other then pension offsetting is unlikely to be appropriate.
Pension earmarking allows you to set aside a proportion of the pension’s income to be paid in the future. This is a kind of deferred maintenance payment. The idea is that the spouse with the pension scheme will pay a percentage of their income or tax-free lump sum to their former spouse when they retire from the scheme.
Pension earmarking orders only come into effect when the pension scheme member decides to take their benefits. Therefore, a number of problems could occur:
- The pension scheme member could decide to delay retirement. This would mean that the ex-spouse would not receive income until that date occurs;
- If the dependent ex-spouse pre-deceases the pension scheme member then all benefits are lost;
- The benefits are lost on remarriage of the dependent ex-spouse;
- The pension scheme member could take action to reduce the future benefits of the ex-spouse. For example, they could reduce contributions to the pension scheme, or take a risky investment strategy inappropriate for the ex-spouse.
Earmarking can be appropriate where the divorcing couple are older or where the pension scheme has assets which are not easily split.
Pension sharing allows you to divide the pension plan so that the divorced spouse can take a slice and set up a new pension in their own name. Depending on the scheme, the ex-spouse will get benefits under the pension scheme in their own right, or get to transfer to a new pension scheme of your choosing.
For most people this option is the simplest. One spouse loses a portion of their pension and the other gets a new plan in their own name. This means you get a ‘clean break’ from your former spouse and get to decide the future direction of your pension plans without interference.
Pension sharing also means that the spouse receiving the pension credit will not lose out if they remarry in the future.
Getting financial advice with pension options on divorce
You will decide on which pension options on divorce are best for you with the help of your solicitor. It is common for divorcing couples to separately seek financial advice.
Changes to your financial circumstances
Divorce has a drastic effect on the finances of both parties. Often you will need to secure a new home and if your pension arrangements are affected by the options above you will need to re-examine your financial future. Financial planning can help you to re-assess your financial goals so that you can work out a plan to get your finances back on track. This applies whether you are receiving assets or losing them under the financial settlement. Read our article on collaborative family law and pensions.
It is most common to use pension sharing on divorce as this tends to be a straightforward way to divide up pension assets. If you are receiving pension assets you will probably need financial advice on what to do with this money. Your solicitor is not permitted to advise on these issues and will turn to a pensions specialist (like us) to help you to make the best use of this asset.
In these situations we would help you to find an appropriate pension plan to invest your new money. We would then work with you to build an investment portfolio to help this money to grow towards your future retirement. We specialise in helping divorcees to manage their pension assets on divorce.
Read our pensions and divorce case study to find out more.