Separating from your partner is rarely an easy decision, and when it comes to finances upon divorce or dissolution, there’s a lot to take into consideration. As your primary concern will tend to regard tangible assets and how to divide them, it may be the case that you haven’t even taken into account the potential impact the divorce will have on your pension. However, your pension can often be the biggest financial asset after the family home. Understanding the financial implications of your separation early on will benefit you in securing a solution that works for your needs.
How will my pension be affected following a divorce?
How your pension will be affected following separation will depend on your age and how long you have been married. If for example your marriage has been short, and you are in your twenties, it is unlikely that your pension will need to be formally divided. However, this is not to say that their value will not be taken into consideration in some cases. If you and your partner are in your fifties or above, it’s likely that your pension will play a more significant role in your divorce.
Can pensions be divided?
When it comes to your pension during divorce, the court can choose to make one of two orders: an attachment earmarking order or a pension sharing order.
An earmarking order can be set up to allow the retirement fund to stay in the name of the original pension holder. When the pension fund becomes payable, the pension scheme is required to pay a certain percentage to the spouse of the pension holder. This could be a lump sum or as a regular payment. While an earmarking order allows the pension to stay in the same name, it does have its drawbacks – the most significant of these being the fact that it does not result in a clean break for the couple, as one spouse is linked to the others pension scheme. Furthermore, if the pension holder dies before retirement, the remaining spouse will not receive any of the retirement funds. Similarly, if the other spouse chooses to remarry, they will not receive a percentage from the pension scheme.
Pension Sharing Order
If the court makes a pension sharing order, a percentage of the Cash Equivalent Value of the pension holder’s fund will be transferred into a new scheme set up in the other spouse’s name. With a pension sharing order, the receiving spouse can control when to draw the benefits of the pension as it has become completely independent to the original pension holder’s account. This is generally the most common order for a court to make and is not affected by the pension holder’s death or a remarriage.
Another option you have is to offset your pension against other assets. For example, you may choose to have a larger share in the property in exchange for your share of your partner’s pension. However, while this sounds like a good idea, it can often become complex. Pension assets are not as easy to cash in as non-pension assets, and it can be difficult to reach an agreement on their value compared to tangible assets such as property.
What should I do next?
One of the first things to do is to find out exactly what pension you and your spouse have. Each pension scheme has different rules, so it’s good to get to know what your pension scheme entails.
Find out the value of your pension
It’s a good idea to find out the value of your pension at an early stage. Pensions are usually valued at their ‘Cash Equivalent Transfer Value’, which means the amount you would receive if you chose to take your pension elsewhere (i.e. to another scheme.) This tends to be less than the original value as transfer fees are included. Your pension provider will be able to give you a statement of your cash equivalent transfer value for free.
Work out how much you will need in retirement
The next step should be about calculating how much you will need in retirement. This will be different for everyone, but generally speaking, you should take into consideration:-
- Rent/Mortgage Payments
- Cost of Living
- Overheads (loans, subscriptions)
Find the right divorce solicitor for you
As with any divorce or separation, no two situations are the same. It is always recommended that when it comes to your divorce, you chose the correct solicitor for you as things can quickly become complex when it comes to your finances.
At Crisp and Co, our expert team of divorce solicitors has a track record for helping clients through the process of separation with minimal fuss. When it comes to pensions, we can provide strategic advice that’s tailored to your unique situation and use tactical negotiation to achieve your desired outcome.