November 17th, 2023
3 important things to know about pension sharing in a divorce
In the year 2000, changes in the law meant that pensions could now be shared during a divorce.
Although this legislation came in 23 years ago, recent research published by PensionsAge, which examined UK divorces between January 2016 and August 2022, revealed that only 1 in 8 of these splits involved dividing a pension.
As a married couple, your home and your pensions are likely to be the most valuable assets you possess – in fact, the Telegraph reports that as of 2022, pensions made up a greater proportion of UK wealth than property. Yet while it is very common to discuss the division of property assets in a divorce, pension sharing is not often considered as carefully as it could be.
With all this (and more) to consider, here are three important things to know about pension sharing in a divorce, and how we can help you weigh up your options.
1. There are several routes you can take when sharing a pension during a divorce
As with most things in life, there is no “one size fits all” approach to pension sharing, but rather an array of options that couples can choose from when going through a divorce.
Here are three of the most popular pension routes divorcing couples can take.
This is perhaps the simplest way of splitting a pension, as it involves either the individuals or the court determining a division of pension assets upon divorce.
In this case, your pensions are valued and a Pension Sharing Report is often created, which takes several factors into account, including:
- The non-pension wealth each person has
- The other assets that are being shared out in the divorce
- The financial responsibilities each person is taking on, especially when it comes to custody of children.
When the sharing arrangements are agreed, one person may need to start a new pension pot, or have the funds transferred into their current pension.
This option involves offsetting the value of a pension against other possessions you have as a couple.
For instance, if your pensions are worth a total of £500,000 and your property is valued at the same amount, one person could take the entire property and the other could receive the pension wealth.
Earmarking a pension in a divorce means that, rather than splitting the assets up now, part or all of one person’s pension is reserved for the other person when they reach retirement.
Although helpful down the line, this does mean that one party won’t receive an injection of capital when the divorce happens, and will need to wait until retirement to reap the benefits.
Each of these options is worth exploring if you’re going through a divorce. A financial planner can talk you through each one in more detail, either alone or with your spouse, to determine which might fit well within your circumstances.
2. The removal of the Lifetime Allowance could increase the need for pension sharing
The need for considering a pension split if you’re divorcing is even more pertinent now that the Lifetime Allowance (LTA) tax charge has been removed.
Previously, the LTA limited how much pension wealth a person could amass tax-efficiently throughout their life to £1,073,100. If they surpassed this, they could have received a weighty tax bill upon withdrawal.
Now that the LTA has been removed, your and your spouse’s pensions could be worth even more, furthering the need for well-advised pension sharing if you were to divorce.
This is especially true considering that pensions do not typically form part of a person’s estate for Inheritance Tax (IHT) purposes. So, if you have children, discussing how to share your pensions may not just affect you now, but could affect your children’s inheritance later.
With all this in mind, remembering that your pensions are a highly valuable asset (with the potential for further growth) could help you to prioritise them in divorce proceedings.
3. Working with an expert early on in a divorce could help you split your assets equitably
Although it can be difficult to reach out for support when experiencing a stressful life event, taking financial advice early in your divorce could make a big difference to both your finances and your wellbeing.
According to research from Legal & General, only 3% of people take advice when their marriage ends. Despite this low number, doing so could help you:
- Consider how your financial plan might change after a divorce. This is especially important for women, who according to Schroders, see an approximate 33% drop in income following a divorce, compared to an 18% decline for men.
- Think beyond the here and now. Divorce can be very stressful, and often, those involved simply take things one day at a time. We can help you think about your future, even when you’re under pressure today.
- Explore pension sharing options, among the division of other assets. The financial side to divorce can be overwhelming, so we’re here to break down the jargon and help you figure out an action plan that works for everyone.
You don’t have to manage this difficult process alone – we’re here to help every step of the way.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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 Financial Conduct Authority does not regulate estate planning, tax planning or will writing.