Pensions and divorce

There are basically 3 ways assets may be dealt with and they are explained below:

Splitting

Usually the best settlement as it offers a clean break.  Simply put the assets are split 50/50.  In other words the house could be sold and all the equity is divided in half.  With a pension, a court order would be obtained and lets say the wife has a £100,000 pension, the pension company would be required to set up a new plan for the husband with £50,000 leaving £50,000 for the wife.  You are both then free to move forward and make your own arrangements as you see fit.

Summary:  Each party is free to ultimately take benefits as they require, for example retiring at different ages and times.  You can both then take benefits in very different ways (one using an annuity and one using drawdown for example).  Each party has full control over the chosen pension provider and is able to use specifically appropriate investments in line with their own needs.

Offset

I like to call this “horsetrading”.  In other words, the husband keeps the house and the wife keeps the pension where they are of similar value.  It does not necessarily require a court order and does provide a clean break but carries some disadvantages.

The main disadvantage is the shape of the settlement.  To try and explain, if the wife ends up with the pension of £100,000, where is her cash coming from and how is she now going to restart her life and buy a new property to live in given the pension is an illiquid asset?  Where the wife is young she may have no short term access to the pension itself (as access is denied prior to age 55).  How will she raise capital to buy a new home?

To the husband, he now has no retirement provision, he does have the home but thought must now be given to how he will now fund retirement and provide for himself later on.

Summary:  Offsetting does provide a clean break also and each party is free to get on with their lives independently.  The timing of taking benefits for example is not affected by the other party and you each still have your own lifetime allowance for example.  There is likely to be an imbalance in the liquidity of assets each party receives.

Earmark

More common with some final salary schemes although carries many disadvantages, in particular it is not a clean break.  Basically imagine the husband is entitled to a pension of £10,000 per annum from his employer’s final salary scheme.  The court may compel the trustees to earmark half (or £5,000) of this for his ex wife.  Seems simple enough, however both parties are reliant on the ex-husband to start drawing benefits to trigger the commencement of income to the ex-wife.  Let us say the scheme has a retirement age of 65, the ex-wife may wish for income to start at 60 but she has no choice in the timing of benefits and will have to wait to her ex-husband reaches 65 and begins drawing benefits.

Another issue is all pensions are taxable income, but although the ex-wife is absolutely entitled to the income it is taxed on the ex-husbands position.  Simply put, where the ex-wife is a none taxpayer and the ex-husband higher rate taxpayer, the income would suffer 45% tax deduction before being paid over.  The ex-wife would be unable to reclaim this. 

Yet another issue is the pension and income is only payable in the ex-husbands lifetime.  Simply put, where the ex-husband pre deceases the ex-wife, her income will stop immediately as dependents pensions are unable to be made subject to an earmarking order.

Summary:  Definitely not a clean break.  The ex-spouse remains permanently dependent on the spouse whose pension it is to draw and time their benefits.  Risks increase as the pension dies with the ex spouse who owns it.  Tax can be excessive where both parties have widely different income when received.

At Financial Fortress, we hold the advanced pensions qualification AF3 and have many years advising clients on the pro’s and con’s of each option.  We will work in each parties interest, taking a view of your entire financial situation to leave you in the very best position going forward.  Your adviser will help you restart your life, taking account of your specific situation ensuring you are not disadvantaged financially.