WFH can cost marriage dear

How to sort pensions if it comes to splitting up

Divorce rates as a proportion of marriages are near their lowest in nearly 50 years.

But 2022 could easily change this trend as we’re spending far more time together under one roof – working, playing and... arguing.

So if the worst happens and you get divorced, what happens to your pensions?

There are three methods by which pension benefits are taken into account in divorce, each with their own considerations.

Offsetting is the oldest and still the most common way to deal with pension benefits in a divorce.

It allows you to balance the value of the pension against other family assets – e.g. “I’ll take my pension, you have the family home.”

It’s attractive if the divorcing couple are fairly young, both working and have no children, or where each party has sufficient assets and/or pension of their own not to need the other’s.

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 themselves, they will need a replacement pension.

Legally, courts assess nonpension capital, pension assets and income when deciding how to share a couple’s 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 divorces over the age of 55 – a demographic where numbers are rising – there is now complete access to defined contribution pension funds.

Earmarking is another way of dealing with pensions. It’s where a court tells the pension provider to provide a pension income to the ex-spouse from the date the member draws their benefits. This is only advantageous 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 on when or how they will receive an income, or how the pension investments are managed.

It’s also taxed on the tax rates of the person drawing the pension, which may be higher than the ex-spouse. The third method is sharing, which 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 a pension themselves.

Also, if the ex-spouse is looking to remarry, unlike earmarking, pension sharing is unaffected by this.

But if the retention of the family home is key for the ex-spouse, then sharing may tip the value of assets to an extent it is unviable.