When it comes to dividing up assets on divorce, pension rights can turn out to be one of the most valuable elements – and often the most overlooked.
The transfer values of final salary pension schemes have been at record levels over recent years. In a paper published last October, the Financial Conduct Authority reported that employee benefit consultancies were recording “the average size of transfer at over £250,000”.
The regulator’s focus has been on the wisdom of moving such final salary pension benefits to other pension arrangements. However, there is another aspect of large transfer values that is worth thinking about: the role they can play in divorce settlements.
A final salary pension benefit could be the single most valuable part of a financial settlement in a divorce. Yet there is anecdotal evidence that pensions are sometimes overlooked when agreeing a settlement, perhaps because their value is not fully appreciated, or it can all seem too difficult when more immediate practicalities are the primary concern.
UNDERSTAND THE OPTIONS
In the UK, there are currently three main ways of dealing with pensions on divorce:
- Pension sharing: With pension sharing the ex-spouse/civil partner’s pension(s) are shared (as the phrase suggests), with a percentage (or specified amount in Scotland) allocated to the ex-spouse/ partner. The shared element is either retained in the existing pension scheme or transferred to the ex-spouse’s/civil partner’s scheme. In practice, schemes often insist on a transfer being made.
- Pension offsetting: This avoids disturbing the existing pension and instead involves offsetting its value against other assets. For example, one spouse might gain a larger share of the family home in exchange for receiving no pension benefit from the other spouse. However, calculating the appropriate level of offset can be difficult, not least because of the tax calculations involved.
- Pensions attachment orders (pension earmarking in Scotland): Under these arrangements, the ex-spouse/civil partner receives a specified proportion of the pension and/or lump sum when the divorced member starts to draw benefits (in Scotland, it’s just the lump sum that can be earmarked). A potential drawback is that the ex-spouse/civil partner may not receive any benefit if the other ex-spouse/civil partner dies before any benefit has been drawn.
Each option has its advantages and disadvantages and it is possible that the divorcing couple will see different routes as offering the best solution. For example, pension sharing and pension attachment orders/earmarking both require a court order to take effect, but this isn’t necessary for offsetting.
SEEK PROFESSIONAL HELP
If you are ever involved in a divorce, make sure you get expert guidance on your pension options. There may well be more than one pension involved and it might be difficult to obtain the relevant data, so the sooner you seek advice, the better. Contact us now and we can:
- Explain how each of the options would work for you;
- Assess the transfer value that has been calculated for any benefits;
- Advise on any pension transfers required; and
- Explain how you can improve your financial position at retirement.
The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Occupational pension schemes are regulated by The Pensions Regulator.