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Pension advice and divorce

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This is a long 'un but stay with us - there's a bit to learn and it's worth getting right.

When it comes to a break-up, each half wants their slice of the family home, but pensions may be neglected amid the tussle. Forgetting about pensions is a really common mistake - in many cases a pension will be the second largest financial asset. At the same time, if one person has taken on caring responsibilities, they may not have contributed much to personal pensions or workplace pensions. Their settlement on divorce may be their only chance to create a secure future for themselves.

However, deciding on the split is complex. Bear in mind that pension advice can be worthwhile investment.

Finding the value of a house just requires a trip to the local estate agents but finding out the true value of a pension is not always so easy, particularly some of the 'gold plated' company schemes know as 'final salary' or 'defined benefits'. This may be a particular problem for those ‘silver separators’ already in retirement.

Disclosure (bring out your schemes)

When completing your financial disclosure document (it’s called Form E), both parties will need to provide the values of all the pensions they hold. This will include:

  • Workplace pensions (this means those under auto-enrolment, too)
  • Personal Pensions (also known as private pensions or SIPP pensions, which stands for Self-Invested Personal Pensions)
  • State pensions

Workplace pensions: You need to find out whether the pension funds you hold are defined benefit (where you get a percentage of your salary at retirement), or defined contribution (where your pension value depends on how much you and your employer have put in and how much it’s grown). Your HR department should be your first port of call. You will also need to track down any previous pensions. Try the Pensions Tracing Service, but careful, not all are affiliated with the Department of Work and Pensions. For ‘final salary’ or ‘defined benefit’ schemes you will need a Cash Equivalent Transfer Value or CETV. For defined contribution, you’ll need the fund value.

Personal pensions: These are pensions you have taken out independently, rather than through your employer or those paid by the state. You’ll need the fund value from the pension provider. Contact details should be on your annual statements or online if you’ve got one through a platform such as Hargreaves Lansdown.

State pensions: It’s not currently possible to share State Pensions, but they can be taken into account when working out a fair split. It is possible for one spouse to boost his or her State Pension by using their former partner’s National Insurance record. Check your entitlement here. Older divorcing couples may already have pensions being paid and details of these also need to be provided.

In all cases, the values should be no more than three months old and all scheme administrators are required to provide them. In Scotland, only the value of the pensions built up during your marriage or civil partnership are taken into account.  In the rest of the UK it’s the total value that’s used before and during the time you were together.  That can make a big difference so it’s important to know which rules apply to you.

Once you’ve got full disclosure, you can decide on how it should be split. If you want to know a pounds and pence figure for how much a pension pot would buy you in retirement, try one of the online pension pot calculators, such as this one from Prudential.

The split

There are three main ways that pensions can be dealt with in a divorce:

Offsetting:

  • the value of the pension is offset against other assets
  • e.g. one spouse keeps the pension & the other keeps the house
  • The simplest & ‘cleanest’ option for many as it gives a clean break

Attachment or earmarking:

  • You get some of your ex’s pension when he or she starts taking it.
  • This may sound simple but you won’t get anything until your ex does, which can mean waiting a long, long time (particularly if your ex is vindictive)
  • It used to be the only option if there were no assets to offset
  • Unless there are no other options, this is often avoided as it doesn’t give the clean break many want.

Sharing:

  • You get a share (%) of your ex’s pension or pensions.
  • Your share is either held in the same scheme or transferred to your own pension.
  • This is the newest and most popular option, getting round the problem of a lack of alternative assets to split.

Points to consider:

If there's a bit of an age gap and one of you has already retired, a deferred pension sharing order can be made. This will come into effect when the younger partner is able to receive a pension (normally 55).

You can agree an offset order between you but only a court can make a pension sharing or attachment order.  If there is a final salary or defined benefit scheme involved, a joint expert (normally an actuary) can be appointed to calculate the values and what percentage share the court should make to achieve pension equality.  This would typically cost about £1,200.

In most cases a pension sharing order will be agreed and the court will issue the appropriate documents for it to start once the financial settlement has been worked out. This will give you the right to a ‘pension credit’ from your ex’s scheme. Most public sector schemes, like the NHS for example, insist that pension credits remain in the scheme and they do not allow you to transfer away to a personal pension. You would become a member of the scheme and receive your benefits at the normal retirement age in the same way as your ex.

Most private sector schemes are more than happy to let you take your pension credit off to your own personal pension. It is worth consulting an adviser before you do this. No matter how much you hate your ex and everything to do with them, their company might offer a really good scheme. Final salary or defined benefit schemes, in particular, often come with valuable benefits payable on your ex’s death to you or any children. These are often lost following divorce and you should take them into account in the negotiations. It’s really hard when emotions are roiling, but the more pragmatic you are the better the outcome is likely to be.

Actions

To implement the order, the pension scheme will require both you and your ex to take certain actions. You will need to nominate a pension to receive your credit. The scheme will charge for implementing the order so that will be more fees.  If your ex doesn’t comply, the sharing order can’t proceed and it remains under their control.  You can go back to court to make things happen if they’re being awkward.  The whole process can take up to 4 months but when it’s done, the pension credit is under your control and nothing to do with your ex.

Some things to watch out for:

If one of you has pensions worth over £1 million there could be tax issues due to something called the lifetime allowance. This is another issue where good pension advice is essential. You can find an adviser on Vouchedfor – or Unbiased.

The pension freedoms introduced in 2015 mean that it’s possible in many cases to withdraw the full value of a pension fund at 55 (although a hefty tax bill is likely to follow). This could be useful in the overall negotiations about a financial settlement.

If you share some of your pension with an ex it means that you’ll have less than you thought when you retire and you should think about saving extra to make up for it. Again an online pension pot calculator can give you an indication of how much income your current pot will buy you, and how much extra you need to save.

As with most things about divorce, the process is boring and arduous but worth getting right. Once it’s done properly, you never have to think about it again and can focus on the future – possibly including a new squeeze you met in the Bahamas.

Read next: Divorce: Common Misconceptions

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