Going through a divorce is difficult, so it’s not surprising that many couples are failing to consider their long-term future and whether they need to discuss splitting pensions. 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 are divorcing, overlooking pensions, which may be among your largest assets, could leave you financially vulnerable in the long term. While the law changed in 2000 to allow pensions to be shared in divorce, just 1 in 8 couples are doing this two decades later, according to a Guardian report.
While it’s common to share property, savings, and other assets as part of divorce or dissolution proceedings, pensions are often missed. So with this in mind, read on to discover how you could ensure your long-term financial future if you are divorcing.
Women are losing out on £5 billion of assets each year
The gender wealth gap means that it’s often women who are affected by not considering pensions during the divorce process.
According to the Guardian, married men aged between 55 and 64 have more than three times the pension wealth of married women of the same age. Among the age group that is most likely to get divorced – those aged between 45 and 54 – the gap is smaller, but it could still harm long-term plans. Men in this age category have, on average, £86,000 in their pension, compared to £40,000 for women.
A Scottish Widows report estimated that women lose out on £5 billion of assets every year because divorcees are ignoring pension wealth. The effect can be especially harmful if you’re nearing retirement, as you have less time to catch up on contributions and benefit from investment growth.
Furthermore, a fifth of women over 50 plan to rely on their partner’s income, and 40% of women over 55 don’t have any pension wealth. Despite this, every year up to 6,000 women aged over 60 get divorced.
If this includes you and you’ve been planning to rely on your former spouse’s pension, it’s vital that their pensions are taken into consideration to ensure your long-term financial security.
How to make pensions part of a divorce process
One of the challenges of including a pension in the divorce process is understanding its value. It could be years before you’re able to access pension savings, so you may instead focus on assets that will provide security now, like property or cash savings.
However, your former spouse’s pension could be worth considerable amounts of money. Your financial planner can help you understand how much your former spouse’s pension might be worth, and how you might be able to share it as part of your settlement.
The following are three ways this may be achieved:
1. Pension sharing: With this option, pension assets are split immediately. One partner will be awarded a percentage of the other’s pensions, which can then be transferred into a pension in their own name. Pension sharing allows for a clean split and means both parties have control over their own pension provisions.
2. Pension offsetting: Each party keeps their own pension assets in this option. However, the value of the pensions is considered when dividing the remaining assets. For instance, the person with the lower pension wealth may take property to offset this. This can be a simple way to divide assets, but may also mean one person is left with little or no provision for retirement.
3. Pension earmarking orders: Also known as “pension attachment orders”, this means some of a partner’s income will be redirected to their ex-partner when the pension benefits are paid. It would mean a couple’s finances are still linked, so it doesn’t allow for a clean break. For example, there may be some uncertainty around when the payments will be paid, as it will depend on when the pension holder retires.
Get in touch
If you’re getting divorced, it’s important to understand the value of your and your ex-spouse’s pensions. Furthermore, it’s worth reassessing your goals and financial plan as your lifestyle and expected income could be very different to your previous plans.
By speaking with your financial planner, you could gain a clearer understanding of your financial situation and what implications this could have for your short-, medium- and long-term wealth.
For more information, speak to your financial planner or contact us below.
This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. The information is aimed at retail clients only and contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate will writing or estate planning.