Divorce could leave you £2,100 worse off per year
No one enters marriage expecting it not to last, yet the Office for National Statistics estimates that 42% of marriages in England and Wales will end in divorce. The statistics also show that the younger a couple is when they tie the knot the more likely it is that they will file for a divorce and the likelihood of a marriage ending is greatest between the fourth and eighth wedding anniversaries. It is estimated that a divorce can leave you with £2,100 less pension income per year.
When a couple parts ways there can be conflict deciding who gets what from the assets. In many cases the family home is considered the most important asset and can cause a lot of heartache for both parties, but pensions also come under scrutiny and the final decision could have a huge impact on your retirement income.
What happens to pensions in divorce?
In divorce courts, pensions are considered as assets and as such will be divided between the divorcees as deemed appropriate. There is no given rule for how a pension is to be divided between a separated couple so it is ultimately the judge’s decision. There are three ways that pensions can be accounted for during divorce: offsetting, earmarking and pension sharing.
When the new pension rules were introduced in April a loophole that overrides earmarking agreements was discovered. The new freedoms allow pension savers aged 55 and over to cash in their entire pension fund, but this would deny an ex-spouse entitlement to their share of the pension.
With offsetting, each person keeps hold of their pensions and the value of these can be offset against other assets. For example, if one party has a large pension of around £500,000 they may choose to keep hold of it and offset against other assets of a similar value. Consequently, this means their ex-spouse could receive a greater share of other assets such as the house. Assets are not necessarily divided equally during divorce so you may not receive something of equal value to your ex-spouse’s pension fund.
If you and your ex-partner opt for pension sharing during divorce then you’ll be issued with a Pension Sharing Order (PSO) from the court, which states what percentage of your pension fund is to be given to your ex-spouse, and how much of their pension you’ll receive. This amount can be transferred to a new or existing scheme but, in some cases, you may need to transfer away from your current scheme before you can do this and there may also be fees to pay.
Earmarking is similar to pension sharing as both parties could receive a portion of each other’s pension. The difference is that the amount rewarded to either party isn’t given until they begin to withdraw money from their pensions. It is also given in several payments made over time rather than all at once. The monies are not transferred from your pension scheme to that of your ex-partner, but rather your pension provider will be instructed by the court to make payments directly to your ex-spouse and vice versa.
Although these options seem straightforward, there might be other factors that come into play. For example with earmarking, if your ex-spouse dies before they begin withdrawing their pension you may be entitled to nothing. Likewise, if they die after they have begun taking money from their pension your payments may stop, depending on the terms of the agreement.
The impact of a divorce on your retirement income is dependent on the decisions made by the judge and the method by which the pensions have been accounted for. You may be more financially comfortable during retirement or you may lose a significant chunk of your retirement savings to your ex-spouse.
It is important that you research how best to consider and account for your pension as an asset during divorce. Many people fail to discuss their pensions during divorce and this could be a costly mistake.
Has your retirement income been affected by divorce? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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