Last month, we explained the idea of a “clean break” in divorce. This month, let’s turn to something just as important: pensions. For many couples, pensions are the second largest asset after the family home. Yet they’re frequently underestimated, sometimes even forgotten, in financial settlements.
Why Pensions Matter
Pensions aren’t just about retirement income; they’re long-term financial security. When couples divorce, these funds can be substantial and need careful thought.
Ignoring them could mean one partner walks away with significantly less financial stability.
Different types of Pension
Often several pensions will have been accumulated – for example someone may have been in service (military, NHS or civil service) or had several different employers all with different pension schemes or have been self-employed and arranged their own pension. All will have different benefits that will need to be valued and assessed.
Pension benefits fall into different categories, normally money purchase pensions or defined benefit pensions. In the case of money purchase pensions, the capital value is usually the monetary value of the fund but for defined benefit pensions, the capital value will need to be calculated. Valuations often take months for the pension company to provide.
How Pensions Can Be Divided
Once all assets (including pensions) are valued, there are different ways to deal with them:
- Pension sharing: a percentage of one person’s pension is transferred to the other, creating two independent pots.
- Offsetting: one party keeps more of the pension, while the other takes a larger share of another asset (often the family home).
- Pension attachment orders: the court directs some pension benefits to the ex-spouse, but for several reasons, these orders are rare today.
Which route is best will depend on many factors including age, earning capacity, living arrangements, stability for any children, long-term financial planning, taxation and, of course, the needs of the parties and the value of all the assets in the martial pot.
Taxation and Risk Factors
Two important points to remember:
- Taxation: Pension income is taxable, sometimes at rates of up to 40%. A settlement that looks attractive on paper may be less so after tax.
- Investment risk: Pension values rise and fall with the stock market. That volatility therefore needs to be factored into decisions.
Why Specialist Advice is Critical
Pensions are a complex subject. Even many IFAs (Independent Financial Advisers) don’t specialise in this area. That’s why both legal and financial advice are essential.
If you’re facing divorce, make pensions part of the conversation early on. And if you’re unsure how they should be divided, seek specialist guidance before agreeing to anything.
Who we are.
We are a team of 5 experienced lawyers but, what makes us different to a firm of solicitors, is that we are acting as divorce consultants.
We help people navigate the legal maze and stop them making expensive mistakes. We use our experience of the divorce process to find solutions to lower the temperature and save money.
If the above resonates or you know someone who may benefit from speaking to us, please do contact me. We don’t charge for an initial consultation.