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Dividing your pension in divorce

This year, Pension Awareness Week (11-15 September) marks 10 years of helping people make to the most of their pension. As well as having resources to help you understand more about pensions, the week serves as a good opportunity to explore the options you can consider for your pension in the context of divorce. Here we outline these options and consider how professional advice will enable you to make the most of your financial position.

Even though a pension is likely to be the most valuable matrimonial asset you possess, it is frequently neglected in divorce proceedings. This can be a significant oversight, as dividing a pension fairly is particularly important where one person has contributed financially to the marriage and the other has contributed domestically. So, there are three main options when it comes to dividing your pensions in a divorce settlement:

  • Pension sharing – this is where the spouses’ pension(s) are divided into two separate pots, so that each spouse is left with their own retirement income, meaning that pension sharing is often seen as the easiest way of achieving a ‘clean break’ in a divorce. Pension sharing also allows the parties to move forwards with an understanding of exactly how much they have for retirement, therefore making financial planning easier. There are disadvantages to this approach, however; requiring a pension sharing order from the court can be a more complicated arrangement and this approach may also incur additional costs (for example, if the pension needs to be transferred)
  • Pension attachment order – also known as pension earmarking, this arrangement pays out a percentage of one spouse’s pension income (or a lump sum) to the other when they start taking their pension. While this means that the pension will not need to be split and transferred, there are downsides to this approach. The person paying out from their pension will pay all the tax due on the income, even though their ex-spouse will be taking a percentage. Meanwhile, the person receiving the income has no control over when they receive it. This means that they could be disadvantaged financially if their ex-spouse delays taking their pension. A pension attachment order also keeps the spouses financially tied to one another, so it does not provide a clean break that many going through divorce might be looking for
  • Pension offsetting – this is where the pension holder retains their pension in exchange for other assets. While it can be a good way of achieving a clean financial break, it is essential to take financial advice to ensure you understand how this could affect your financial future. While keeping the family home or a larger portion of your joint savings and investments may be more beneficial in the short term, giving up your right to your ex-spouse’s pension could leave you financially vulnerable later in life.

Financial advice is key

The division of assets in a divorce can be complex. With so many different options for funding a divorce settlement, how do you ensure that the outcome will deliver long-term financial security for yourself and any children?

It is crucial to take financial advice before, during and after your divorce. A professional financial adviser may be able to help you understand what any proposed settlement will deliver across your lifetime, so that you can move forward in the strongest possible financial position.

At Partners Wealth Management, we use leading technology to give you the most sophisticated insights on what your financial future will look like, based on different scenarios. 

Your Lifetime Wealth Model

Many of our clients have referred to Your Lifetime Wealth Model as the nearest thing we offer to a crystal ball. In reality it is on online methodology that helps you see the details of all your wealth and assets according to different scenarios. With a clear and detailed financial model in place, it enables you to make important strategic decisions about your finances from a place of knowledge.

For example, let’s assume that you would like to understand the long-term impacts of keeping the family home in exchange for your ex-spouse keeping 100% of their pension. To help you understand the consequences of this option, we start by plotting our known variables, such as your income, assets, liabilities and expenditure. Then we add in some ‘what if’ scenarios to help you understand what might happen in each of them; for instance, keeping the family home in exchange for the pension, or selling the property, splitting the proceeds and sharing the pension equally.

All this information is used to produce a clear illustration of your potential cashflow throughout your lifetime and reveal the scenario that will likely leave you in the best long-term financial position. You and your solicitor can then use this information to push for the best financial settlement for your circumstances.

Get in touch

At Partners Wealth Management, our advisers have years of experience in helping divorcing couples to disentangle their finances, including their pension, helping them to move on with their lives in the best possible financial position. Our aim is simple and straightforward; to provide you with the peace of mind that comes from knowing that your financial arrangements have been independently reviewed, and that you have a comprehensive plan in place for the future.

To find out how we can help you, please call 020 7444 4030 or email us at info@partnerswealthmanagement.co.uk.

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. Past performance is no guide to future returns. The above content does not represent a personal recommendation. Taxation will depend on your individual circumstances and may be subject to change.