How much money will you need to live on later in life?
Divorce is undoubtedly one of the most difficult subjects to talk about. When relationships come to an end, there are so many things to consider – children, home and support are naturally the first things you would focus on. In fact, when you begin the process of separating a shared life, the sheer number of things to deal with can seem very daunting. And the cost of divorce can have a lasting impact on your plans for later in life.
What is likely to be a divorcing couple’s most valuable asset? The family home will spring to most people’s minds first. But with the value of final salary pensions climbing, that forgotten ‘defined benefit’ income could well be the biggest single asset in the relationship.
A new study[1] has revealed that divorcees retiring this year can expect to receive up to 18% less in retirement income. While it may not be the first thing you need to think about, a pension fund is likely to be one of the most difficult assets a couple will have to split in the event of a divorce, so it’s best to start this process early.
Average expected annual income:
- Never suffered a marriage breakup – £21,400
- Divorced – £17,600
Many may not realise that the cost of divorce can last well into retirement, as divorcees expect retirement incomes of nearly £4,000 less each year than those who have never been divorced.
With the Office for National Statistics[2] confirming that divorce rates are increasing for men and women over 55, it is an issue likely to affect a growing number of the baby boomer generation.
The stress of getting through a divorce can mean people, understandably, focus on the immediate priorities like living arrangements and childcare. However, a pension fund and income in retirement should also be a priority. Before planning how to separate your pension assets, you may want to consider how much money you think you will need to live on later in life.
So, what are your options?
It’s never easy when things come to an end, but support and advice can make the journey clearer. So what are the options available when you are ready to look at separating your assets?
Firstly, it is important that you both list the different pensions you and your ex-civil partner or spouse have. Then you can start to explore the options.
Across the UK, there are three core options to consider when you are separating pension assets:
- Pension sharing orders
- Pension attachment orders (called ‘pension earmarking’ in Scotland)
- Pension offsetting
Some of these options need to be administered by the courts, and not all of them will be suited to your individual circumstance.
1. Pension Sharing Order
Pension sharing is one of the options available on divorce or the dissolution of a civil partnership. Each party owns a share of the pension fund but is able to decide what to do with their share independently. This provides a clean break between parties, as the pension assets are split.
2. Pension Attachment Order
This redirects some or all of the pension benefits to you or your ex-civil partner or spouse at the time of payment. When the person who owns the pension receives their benefits, the pension provider makes a payment to their ex-civil partner or spouse. With this option, you don’t get the clean break as you would from the pension sharing order.
3. Pension Offsetting
With pension offsetting, the total assets are considered and then divided up. For example, if your ex-partner has a large pension pot, they may decide to keep this, as you may agree to receive an asset of similar value (for example, the house).
A pension fund is one of the most complex assets a couple will have to split, so anyone going through a divorce should seek legal and professional financial advice to help them do so.
For many more couples, the increase in value of pensions means that it is often the largest asset. It goes without saying that this advice is crucial as early as possible in any separation where couples have joint assets.
Here at Hugh James Independent Financial Advisers, we work closely with our expert family team who can provide you with the legal advice during a separation. Considering all areas of your finances early within the separation process is vital to ensure the process is as painless and as fair as possible.
Source data:
[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9,896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.
[2] Latest divorce statistics from the Office of National Statistics, published 18 October 2016
Important information:
A pension is a long-term investment.
Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
