Pension splits when love quits
How to get a fair share from your ex for later life
Divorce rates are set to soar, with couples counting the cost of being cooped up together this year.
There were 90,871 divorces in England and Wales in 2018 and 6,873 in Scotland, although divorce rates as a proportion of marriages were at their lowest rate in nearly
So if the worst happens in a marriage, what happens to pensions? There are three methods to take into account, each with their own considerations.
This is the oldest and most common method of dealing with pension benefits in a divorce. Offsetting allows you to balance the value of the pension against other family assets. For instance: “I’ll take my pension, you have the family home.”
It’s attractive when the divorcing couple are fairly young, both working and have no children, or when each party has sufficient assets and/ or pension income in their own name so do not need the other’s pension.
It’s less attractive when one person’s pension value is high relative to other assets because it makes the offsetting process difficult. And if the spouse has little or no pension, they will need a replacement pension at retirement.
Courts assess non-pension capital, pension assets and income when deciding how to share the estate. But with pension freedom rules, there is a blur between capital and pensions, which makes it more difficult to predict what a judge is likely to do.
For divorcees over the age of 55 – a demographic where divorce numbers are rising – there is complete access to defined contribution pension funds.
This enables an English or Welsh court to tell the pension provider to give an income to the ex-spouse from the date the member draws their benefits.
The only time I feel this is advantageous is when someone (the member) is already in receipt of their pension, albeit the income may stop on the member’s death.
The reason I don’t like it is because the ex-spouse is dependent. They have no control over when or how they will receive an income, or how investments are managed. It’s also taxed on the tax rates of the person drawing it, which may be higher than the ex-spouse.
It doesn’t provide a clean break or help couples to move on.
In 2018, there were more than 90,000 divorces in England and Wales
Sharing effectively splits the pension and provides the ex-spouse with a pension fund in their own right.
It’s best when the ex-spouse is close to retirement and doesn’t have time to build up a pension. And if the ex is looking to remarry, unlike earmarking, pension sharing is unaffected by this.
If the retention of the family home is key for the ex-spouse, then sharing the pension may tip the value of assets to such an extent that it is unviable.
For a more in-depth discussion on pensions and divorce, you can listen to The Money Planner podcast.