What does divorce mean for your pension?

Pensions and divorce are two things that nobody wants to think about, but for very different reasons. However, if you’re going through a divorce, it could be worth knowing what the impact on your pension is.
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Divorce is rarely an easy process, made more complicated and emotional with the splitting of assets. There can be a lot to think about there, most people immediately think about the house, the savings accounts, any ISAs, but this misses out on of the biggest assets you’re likely to hold - your pensions.

 

Will my pension be split in a divorce?
The answer to this question will depend on the type of pension you have, where you live in the UK, and whether you’re divorcing or dissolving your civil partnership.

The types of pensions that can be split include:

How much can be divided and precisely what is included will depend on a multitude of different factors, but here’s a quick summary.

 

How it differs in Scotland compared to the rest of the UK
In England, Wales and Northern Ireland, the total value of all your pensions are considered – that’s private and workplace pensions together. And there’s no timeframe on when you contributed, it’s a single overview of your total pension amounts.

However, in Scotland, they only consider the amount you built up during the marriage or civil partnership, so everything tucked into a pension before or after the date of separation isn’t included[1].

 

How are pensions divided?
Again, this will depend on the type of pension you have and the rules around that pension scheme. Generally speaking, you will need to get professional advice from your solicitor or financial advisor before you make any decisions on how the pension is to be divided.

Below are some ways a pension can be split during a divorce or dissolving of a civil partnership and what they mean:

  • Pension sharing order – put simply, this is where you or your ex-partner get a percentage share of each other’s pensions.
  • Pension offsetting – instead of splitting the pension, the value of the pension is offset against other things you own, for example, you may get a larger share of the family home
  • Deferred pension sharing – if one of you has already retired and is receiving a pension, but the other is too young to be paid then this is an arrangement made for sharing the pension at a later date. This option is not available in Scotland
  • Deferred lump sum – one member gets a lump sum payment from the ex-partner’s pension when they retire. This is also not available in Scotland
  • Pensions attachment order (pensions earmarking in Scotland) – you split the pension when it starts being paid, either as a lump sum or a percentage of the income
  • Individual agreement – here’s the kicker, it isn’t compulsory to share your pension in a divorce, and you and your ex-partner could choose to come to an arrangement on your own. If you do this, it will need to be legally documented

These are some of the options that  may be available, but as your personal situation will be unique to you, it is important to seek legal or financial advice before making any decisions.

 

What happens if you’ve already retired?
In recent years, we’ve seen a rise in the number of people getting divorced when they’re over 65[2], and therefore would be able to start receiving their pension benefits. In this situation, you are still able to split the value of your pensions, but there will be some options that are no longer available to you.

For example, once an income is being drawn from the pension, you will not be able to take a lump sum out. This is regardless of whether a lump sum has already been drawn or not[1].

 

Who gets the pension in a divorce?
There’s no straightforward answer to this, as it will depend on your personal circumstances, how you choose to split the pension, and how much is in each partners’ pensions. Generally, the aim is to fairly divide your finances during a divorce, but again, not every situation is the same and there may be a reason why this would not apply to you.

Your financial or legal advisor should be able to provide you with guidance on how to split your finances, assets, and pensions.

 

What’s the impact on your overall pension income?
Unfortunately, splitting your pension during a divorce can harm your final pension income. Research has shown that you could expect a drop of around £3,800 in your pension income compared to someone who’s never been divorced[3].

There are a few reasons for this decline in value – firstly, there are significant legal fees to pay, as well as additional pension fees. Then, you have the impact of splitting a valuable asset – for example, if your pensions are collectively worth £100,000 and it is split into two equal £50,000 pots, then you have half the value available for compounding. This is where, your pension earns interest or dividends, which are then reinvested and able to earn even more interest or dividends. Compounding can help your retirement savings add up over the long run. The way you choose to split the pension can have a significant impact on this, as deferring the split can allow the pension to continue growing in one larger account.

 

Life after divorce
Statistics show that opposite-sex couples are most likely to divorce between the ages of 45-49,[4] which means you still have time ahead of you to give your retirement funds a boost. There are a few ways that you could do this. One would be to consider increasing your workplace pension contributions. And, as you’re already signed up, it may seem like the easiest option. However, there are some restrictions here – for example, it’s often difficult to see how your pension is doing, and you may not be able to increase or decrease your contributions easily.

Another option you could consider could be to open a personal pension, as this gives you some more flexibility in how you save for your future. After a divorce, rebuilding your immediate life becomes a priority, but it is also a good idea to think about the future as well. With Wealthify’s Self-Invested Personal Pension you can open an account with just £50 and add to it in a way that works best for you – no fixed monthly contributions and the opportunity to choose a risk style that suits your needs. Plus, you’ll have a team of experts picking and managing your investments, helping to keep you on track and make your money work harder to try and close your divorce deficit.

 

References:

1: https://www.moneyadviceservice.org.uk/en/articles/dividing-pensions-on-divorce-or-dissolution

2: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/marriagecohabitationandcivilpartnerships/articles/marriageanddivorceontheriseat65andover/2017-07-18

3: https://www.pru.co.uk/pdf/20022018-Divorce-Final.pdf

4: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/divorce/bulletins/divorcesinenglandandwales/2017#at-what-age-are-opposite-sex-couples-most-likely-to-divorce

 

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

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