How pension sharing could help divorcing clients avoid a future financial nightmare

While it may not be the happiest way to see in a new year, the first Monday after 1 January has become synonymous with a less cheerful event.

Typically dubbed “divorce day”, the Independent reveals it’s the day solicitors see a spike in filings for divorce, as separating couples decide to start the new year with a fresh start apart from each other.

While being released from a marriage that’s lost its magic may be a reason to celebrate, it could also provide financial challenges for some clients.

According to Pensions Age, almost a third of people expect to rely on their partner’s pension in retirement. If they don’t then secure a settlement in divorce that means they will be financially secure later in life, it could cause major issues down the line.

Despite this, research by Legal & General reveals that nearly a quarter (24%) of people waive their rights to one of the marriage’s most valuable assets: their ex-spouse’s retirement fund.

If you have clients going through a divorce, discover why it could be vital for them to include an ex-spouse’s pension as part of their settlement.

Pensions may be one of the most valuable marital assets

More often than not, the family home is seen as the largest marital asset. In reality, one of the spouse’s pensions might be equally as valuable, if not more so.

This means that if pensions are not included in the settlement, it could put your client’s long-term financial security in jeopardy and deprive them of much-needed income in retirement.

Encouraging your client to talk to a financial planner could help them understand the need to secure an adequate pension settlement. A planner could also ensure they understand the best way to use or invest any pension credit received to help provide the lifestyle they were hoping for in retirement.

Your client may have depended on their ex-spouse’s pension

According to Pensions Age, women were more at risk of relying on their partner’s pension then men. It found that nearly 4 out of 10 (39%) women expected to live off their spouse or partner’s retirement fund, compared to just 23% of men.

The research said the difference was because of several factors, including the lower wages many women receive, working part-time, and putting careers on hold to look after children. That said, it also stressed that relying on a spouse’s pension was not “purely a female thing”.

If your client has a small pension because of the reasons above, there are three main ways in which they could typically claim a share of their former spouse’s pension pot on divorce:

  • A Pension Sharing Order: this is where a court splits the pension using a Pension Sharing Order (PSO), meaning it decides how much of a pension an ex-spouse receives. The share your client receives will be treated as their money.
  • A Pension Attachment Order (formerly known as “pension earmarking”): this redirects part or all of a pension to the ex-spouse when the pension is due for payment. This may also include funds from the tax-free lump sum. That said, nothing can be paid until the pension holder decides to draw an income. Previous earmarking orders issued in England still apply.
  • Deferred lump sum: both parties make an agreement to share the pension at a later date, which can be a more complicated option to arrange.

Your client may also want to consider an “offsetting” arrangement, which we’ll consider now.

Assets to the value of the pension may also be awarded

Instead of the three options above, your client may prefer a pension offsetting arrangement. This is where assets with a similar value to the pension are awarded. This may mean, for example, that your client gets the house and/or the household’s cash savings if they are of similar value to the retirement fund, allowing the ex-spouse to keep their pension.

If assets don’t match the value of a pension, offsetting will not be appropriate.

If your client would like to do this, they might want to consider speaking to a financial planner who can confirm whether this really is the best financial strategy for them. For example, taking the marital home may result in it having to be sold if your client can’t afford its upkeep in the long term. They may also have to sell the property to generate an income to live on in retirement.

Your client may be entitled to the ex-spouse’s State Pension too

Under the new State Pension rules of April 2016, payments are based on an individual’s National Insurance record and, as such, cannot be shared if a marriage ends.

However, under the old State Pension system, your clients may be entitled to share an ex-spouse’s State Pension if they have built up an amount under the old Additional State Pension rules. This is also known as a “protected payment”.

Remember, if your clients are divorcing after retirement, their pension sharing will be treated differently. This is because a pension’s tax-free lump sum cannot be shared once retirement commences, whether it was taken initially or not.

Speak to a financial planner

As you can see, ensuring your client secures a fair settlement around pensions could be critical to their long-term financial wellbeing. Despite this, Legal & General’s research also found that only 3% of those surveyed spoke to a financial planner while divorcing.

It should therefore come as no surprise that the study also found that more than two-thirds (69%) of those surveyed could be liable to a future claim from their ex-spouse.

As an award-winning financial advice business that specialises in helping those going through a divorce, we really can help your client look forward to a brighter financial future. To find out how, please email hello@ardentuk.com or call 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article.

This article only deals with England and our understanding of English Law. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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