The effect of Divorce on Pensions
It has been found that going through a divorce could remove a large chunk of your pension – as much as up to a sixth. The pension will be affected by the cost of legal fees as well as splitting up any assets; on the whole, the financial impact can be severe.
Pensions are a valuable asset but it is vital to understand just how important they are during a divorce. Commonly, they are not even considered during a divorce but for older people, their pension pot is likely to be considerably large.
So what do you need to consider about pensions if you are going through a divorce?
When it comes to divorce, all financial assets have to be put out in the open and this includes any pension you have built up or are claiming for. There are a number of different pensions that can be split up and these are workplace pensions, personal pensions, additional state pensions and state pension top up income. Every financial commitment has to be declared regardless of its size.
Splitting Pensions – The Options Available
There are a number of options available when it comes to splitting pensions. Pension sharing makes it possible to receive as much as 100% of your partner’s pension and this works by transferring the pension into your name or by being added to the pension scheme.
Deferred pension sharing is used if your partner has retired and is now receiving a pension but you are too young to retire and claim. Therefore, an agreement is put in place to share the pension at some point in the future.
Deferred lump sum sharing involves receiving a lump sum from the pension of your partner once they retire.
Offsetting a pension means offsetting the value of all pensions against all other assets making it possible to have the family home while the ex-partner keeps their pension.
Pension attachment will entitle you to a share of any pension when it begins payment although you will have to wait until they start to claim it.
Making the best decision
Pension offsetting is the easiest option because it could be as simple as agreeing on your ex to keep their pension while you get the house and no court order is required. There is a short-term gain from having the house but it could mean that your income is reduced in the long-term. There is also a warning that comes with pension attachment because of the way in which you are left waiting for your ex to begin drawing their pension. There is also a lack of control over the assets while Income will be susceptible to their Income Tax Bracket.
A fair settlement can be achieved through pension sharing because part of the pension is yours and so, there is no issue around control over income or assets. Therefore, assets are transferred across, providing control and a tax rate that is set at your own rate.
Financial Advice – When to obtain it
Pensions are rather complicated to many but there may come a time where you need financial advice. In those cases where pension pots are rather large, advice should be welcomed. Therefore, a financial adviser who is impartial and neutral should be used as soon as possible.
After retirement – Splitting Pensions
If one or both of you have retired, it is possible for pension assets to be split but there could be difficulties. It is not possible to take a lump sum from the pension of your partner if they already receive an income. As it can be tricky for HMRC to find out whether they have taken a 25% sum, they have put a blanket rule in place where it is not possible for the other party to take a 25% tax-free lump sum.
Those couple who are cohabiting
Pensions are not shared if you are not married or in a civil partnership and this means that there is no financial protection in place. For those partnerships where there are children involved, the father will have to provide for the children but is not obliged to support his ex.
For more information on pensions and divorce, please contact K J Smith Solicitors.