A financial adviser can advise on issues such as how to divide assets in the most tax-efficient way and how to invest the proceeds of a divorce settlement.
Latest statistics estimate that 42% of marriages in England and Wales end in divorce. There are important steps you should take to protect your financial position as soon as it is clear that you are going to separate from your partner.
What can happen to pensions in divorce?
The pension can be the biggest asset in divorce or civil partnership dissolution after the family home, so it is important that it’s not overlooked. It can be split in several ways and it’s worth understanding the different options.
How pensions are taken into account
In England, Wales and Northern Ireland, a court has to take into account any pensions and pension rights that you or your spouse or civil partner have when you split up, from state, workplace schemes and/or personal pension plans. In Scotland, any increase in the value of your pension(s) between the date you married or became civil partners and the date of separation will be taken into account.
Getting a pensions valuation
In order to be able to split your pensions fairly, your first step is to find out what they’re worth. Your pensions could include:
• schemes you have through work
• personal pension schemes, and
• additional State Pension (part of the State Pension scheme that’s not the basic State Pension)
The person who has the pension or is a member of the workplace pension scheme has to be the one to ask for a pensions valuation. How your pension is valued will depend on the type of scheme(s) you’re in.
In Scotland, the valuation used for determining the value of the pension rights is the Cash Equivalent Transfer Value (CETV). This is the value which must be used regardless of the type of pension.
Using your annual statement
If you have a workplace ‘defined contribution’ pension where you pay into a pension pot, rather than the amount you retire on being based on your salary, or you have a personal pension, you should check your latest annual statement. This will tell you how much your pension is worth and its ‘transfer value’, which is the amount you would get it you were you to move your pension elsewhere. This is the figure that’s used for a valuation and it may be less than the fund value because it will include any charges or penalties for transferring.
Salary-related pension schemes
If you have a final salary or other salary-related pension scheme, getting a proper valuation can be much more complicated. That’s because you don’t pay into a pension fund, but build up an entitlement to a pension based on:
• how long you have paid into it for
• your salary, and
• how much of your salary you build up for every year you’re a member (it’s called the ‘accrual rate’).
It may be worth getting expert help, perhaps from a financial adviser who specialises in finance and divorce, or an actuary. However, you will have to pay for this, so ask the financial adviser or actuary whether they think an independent valuation is worth it.
• When and where to get pensions help and advice
State pension and divorce
The basic state pension cannot be split at divorce or civil partnership dissolution under current rules. However, you may be entitled to claim a basic state pension using your ex-partner’s national insurance record (for the years you were together), without it affecting the basic state pension they are entitled to. If you remarry or enter another civil partnership before you reach state pension age, you will lose this pension entitlement.
Additional state pension
The Additional state pension is the part of your state pension you build up when you’re employed and this can be split when divorcing or dissolving your civil partnership. It may be made of two parts: SERPS and the State Second Pension (S2P).
The options for splitting pensions
There are three ways that pensions can be divided during divorce or civil partnership dissolution.
• Pension sharing – you’re awarded a percentage share of any one (or more) of your ex-partner’s pensions. This share is either transferred into a pension in your own name, which could be one that you already have or a new one, or you’re able to join your ex-partner’s pension scheme.
• Pensions attachment (sometimes called ‘earmarking’) – you receive an agreed amount of your ex-partner’s net pension income or lump sum (or both) when it starts being paid to them. This means you cannot receive pension payments before your ex-partner has started taking his or her pension. If your ex-partner is much younger than you – or if they retire much later than you – you may have a wait of several years before you receive your share of the pension. In Scotland, this is called a pensions lump sum order.
• Pensions offsetting – the value of any pensions is offset against other assets. For instance, you may have a greater share of the family home in return for your ex-partner keeping his or her pension income.
Do you need a court order?
In England, Wales and Northern Ireland, only a court can make a pensions sharing or attachment order, but in Scotland a Pensions Sharing Agreement can be set up without going to court. However, it will only take effect on divorce or dissolution, which only a court can grant.
Because of the complicated rules about the way the agreement has to be written and because it has to be registered with the pension trustees (those who run the pension scheme) within a strict time limit, we recommend that you take the advice from a solicitor who specialises in pensions before drawing up an agreement.
Splitting your pension after you’ve retired
Pensions can be split after you and/or your ex-partner have retired. However, the rules are slightly different.
For a start, it isn’t possible for you to take a lump sum from your ex-partner’s pension if he or she is already receiving an income from it. This applies even if your ex-partner took a lump sum.