Today is Pensions Awareness Day, and we are featuring a guest blog by Tamsin Caine, founder of Smart Divorce. Tamsin provides specialist financial advice to those who are facing divorce, looking to the future and helping them to build new lives.
When I first speak to clients about their finances, I am often told, “We’re not looking at each other’s pensions”. Whilst divorcing couples accept that they will need to divide the equity in their family home, there seems to be a lack of willingness to accept that pensions are also a marital asset. However, by ignoring them, you may find that you are losing out on valuable benefits to secure your financial future.
An article in the Financial Reporter earlier this year noted that pensions “are often overlooked with seven out of ten (71%) divorce settlements not taking pensions into consideration”. In fact in 2018, divorced women had pension provision 42% lower than the UK average.
The big reason is cost. Many couples want to divorce with as few financial outlays as possible. However, in the long term this could be a false economy. Ensuring that assets are divided fairly is vital. Of the couples that I have spoken to in recording podcasts on this subject, those who feel that their settlement was not fair to them regretted not taking professional advice. You have one chance to get the division right and therefore, it is important not to cut costs because the financial risk to you in the future could be significant.
Pensions are complicated and often require professional advice to ensure that the benefits are correctly understood. Divorcing couples often feel that if they each have a pension that they must have similar values. This is not necessarily the case, particularly if one party has a defined benefit pension, where they will receive a proportion of their salary on retirement.
For many couples, one party would rather keep the house and will look to have their ex keep sizeable pension benefits, rather than share both. This is known as offsetting and has been a popular option in recent years. However, the value of the pension benefits is not always assessed fully. Also, it is important to look at your long-term needs, rather than just what is required immediately.
The complications associated with division of pensions in divorce can be deceptively complicated, with many couples unprepared for the intricacies associated with their particular situation. This makes services such as divorce mediation a valuable option for both parties, where each can be assured that their best interests are considered, and no one party is being favoured.
Other than offsetting, there are two main ways of dividing pensions in divorce, pension sharing and pension attachment. It is now more common for pensions to be split using a pension sharing order, which allows for a clean break to be achieved as the party receiving the share will either become a member of the pension scheme in their own right, with their own benefits, or will transfer their share into a personal pension of their choice.
Pension attachments may have positives, particularly when looking at a defined benefit pension. The receiving party can benefit from the guarantees afforded to the pension owner and avoid the need to invest the pension fund themselves. However, they will have to receive the pension income in retirement at the same time as their ex, i.e. when they decide to retire and draw their pension, and will not be in control. So, this option is rarely used at present.
The finances for the majority of divorces in the UK are divided on a “needs basis”. This means that there are not assets surplus to the provision of the needs of both parties. You are unlikely to be in a position to split your assets and both get everything you need, so some belt tightening is likely to be necessary. Therefore, working out what you need both now and in the future would be the starting point.
At Smart Divorce. we can help you with this part of the process. We will ask you to detail your income and the expenditure you will have after the divorce, both regular and one offs, such as buying a new home and the contents that you will need. Also detail all the assets (savings, investments, pensions, property/ies, cars, etc) and liabilities (mortgages, credit cards, loans, finance, etc). We can then help you to work out what you need and what a fair split may be.
If you would like any help with this stage, or with understanding how an offer from your ex might work for you or implementing pension sharing orders, please drop me an email to [email protected].