3 clever ways to help ensure a divorce does not ruin your retirement
Thanks to one of the biggest shake-ups of divorce law in half a century, it’s now possible to get divorced without attributing blame. Reforms that came into effect in April 2022 mean couples no longer have to make allegations about the other’s behaviour, and can instead divorce using a statement of “irretrievable breakdown”.
This of itself will be “conclusive evidence” that the marriage has irretrievably broken down.
While this could simplify the legal process and remove unnecessary conflict, it may also put the long-term financial security of divorcees at risk. If you’re divorcing or considering separating from your spouse, you may have already discussed the financial implications with us.
If you haven’t, discover how a divorce could put your retirement plans at risk, and how working with us can keep them on track. Furthermore, if you have friends or family members going through a divorce, discover how we could help them.
Pensions may be one of the most valuable marital assets
While the family home is typically seen as the largest marital asset, in reality it’s more likely to be the pension pots. In 2022, the Office for National Statistics (ONS) revealed that private pensions have represented a greater share of total household wealth than property for more than a decade.
If you don’t ensure the marital pensions are split fairly as part of your divorce settlement, it could put your long-term financial security at risk. As your financial planner, we can help you understand how best to split pensions so that you can look forward to a brighter financial future.
Broadly, there are 4 ways to split a retirement fund
While splitting a pension could help provide the lifestyle you want later on in life, research by Legal & General reveals 24% of divorcees waive their rights to an ex-spouse’s retirement pot.
One reason for this is that while many people rightly seek legal advice during divorce, they don’t necessarily speak to a financial planner, even though it’s probably as important to do so.
As a result, some divorcees may not understand how much the ex-spouse’s pension pot is worth, and how splitting it could ensure their financial security. With this in mind, let’s consider the four main ways a pension can be split:
- A Pension Sharing Order: this is where a court orders that a pension pot should be split. The court decides how much of the retirement fund goes to the ex-spouse, and once they have received it, the money is treated as theirs.
- 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 could also include the tax-free lump sum. Nothing can be paid to the ex-spouse 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.
- An offsetting arrangement: this is where marital assets with a similar value to the pension pot are awarded to an ex-spouse. For example, you might receive the marital home or cash savings, allowing the pension holder to keep all of their retirement fund.
The right approach often depends upon the short- and long-term needs of both parties. We often find that the need for housing, particularly when children are involved, can overshadow settlements.
This may result in one party keeping the ex-marital home without having any financial provision later in life. Similarly, the other party could find themselves with pensions that are great for their future, yet don’t provide the money they need now to buy a new home.
We work with clients and their legal advisers to ensure both short- and long-term financial needs are considered, as this can help secure a more appropriate settlement. If you would like more information on how we do this, you can watch our video which tells the story of our client Diane, and how we helped her.
Your financial planner could also help you boost your pension
As you can see, because there are different ways to split a pension, it could be done in a way that suits your requirements and future needs. That’s why we work with you to confirm which is best for you.
That said, if the split does not provide a large enough pension pot for you to enjoy the lifestyle you want in retirement, we could also help you get it back on track. While you can read our useful guide on how to reach your retirement goals, let’s consider three clever steps you could take:
Boost your pension contributions
The money you contribute to a pension typically receives tax relief, subject to certain annual limits. This means that every £100 you contribute could cost you just £80 as a basic-rate taxpayer, £60 as a higher-rate taxpayer and £55 as an additional-rate taxpayer. This means you might be able to boost your pension pot much more quickly than you thought.
Use carry forward
If you have recently received a lump sum divorce settlement or inheritance, you might be able to use “carry forward”. This could allow you to receive tax relief on lump sum contributions that exceed your annual limits.
However, care must be taken with carry forward, so speak to us to ensure you don’t accidentally receive an unwanted tax charge.
Find lost pensions
According to Pensions Age, an estimated 1.6 million retirement funds have been lost or are dormant in the UK. If this includes pensions that belong to you, finding them might provide your retirement fund with the boost it needs.
We can help with this and provide options that might help increase your pension pot’s potential growth in the future.
Get in touch
As your financial planner, if you are considering divorce, we can help ensure you’re financially secure both now and in the future. If you know someone who’s divorcing and could benefit from a conversation with us, we’d be happy to help them.
To find out how, just email us at firstname.lastname@example.org or call 01277 350560. We’d be very happy to help.
Mark MacLean is a member of Essex Family Resolutions, a group for Collaborative Family Lawyers and other Professionals including mediators, arbitrators and family counsellors. Useful information and contact details can be found here https://essexfamilyresolutions.co.uk/
This article is for information only. Please do not act based on anything you might read in this article.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.