How to divide your pension savings if you’re getting divorced and why financial advice could be crucial

If you're contemplating divorce, it's important to think carefully about how to proceed, before you become embroiled in the unavoidable emotional consequences.

Getting divorced can be one of the most stressful and upsetting experiences you can endure. As well as the inevitable emotional difficulties, the financial implications can amplify the stress. Without careful planning, you or your partner could find that you are left in financial difficulty.

And yet, despite the gravity of the situation – and the far-reaching financial implications – according to a report in FTAdviser, only 5% of people consult a financial adviser when getting divorced.

How to decide on a fair divide

When a couple broach the subject of divorce, the two largest assets up for discussion are usually pensions and homes.

Since pensions are typically among the most valuable assets in a divorce, often only bettered by the family home, it’s important to understand how your pension savings may be divided when you get divorced.

There are three common methods for dividing pensions in a divorce settlement:

1. Pension earmarking

By earmarking a pension as part of your divorce settlement, rather than splitting the assets up immediately, part or all of one person’s pension is reserved for the other person’s retirement.

The amount “earmarked” can either be a specific figure or a percentage of the pension.

The main drawback with earmarking is that the party without the pension must wait until their ex-spouse retires or dies before they receive any pension benefits. Another downside is that the recipient of the “earmarked” benefits has no control over the investment decisions their ex- partner takes.

2. Pension offsetting

This method offsets the value of a pension against other possessions you own as a couple.

For instance, if you have pension savings worth £400,000 and own a property of a similar value, one of you might choose to keep the pension while the other keeps the property.

While offsetting is designed to create an equal split at the time of divorce, it doesn’t account for investment performance or market fluctuations that could affect either party’s finances later.

There are some important points to consider with this option. For example, the person who keeps the property may need to sell the house in order to generate an income in retirement. There may also be significant costs for maintaining a property that you may need to take into account.

3. Pension sharing

Pension sharing offers the chance for a clean break. With this option, your pension savings are split and divided between both parties at the time of the divorce.

For instance, if you have a larger pension than your spouse, part of your pension may be transferred over to leave both of you with equal pension wealth when the marriage ends.

Alternatively, the court may issue a Pension Sharing Order (PSO) that requires both parties’ pensions to be split equally. The beauty of this method is that both parties know precisely how much of the pension they will receive or keep on divorce.

A financial planner can help you decide which option is appropriate for you

A financial planner can assist you in evaluating the various options for managing your pensions post-divorce, and ensure you get a pension settlement that best serves your long-term financial security.

Since each divorce settlement is different, the treatment of any pensions will vary from case to case. Indeed, should you and your ex-partner both have your own pensions, they may be ignored entirely.

Pensions may be treated differently depending on where you live

While dividing pensions is common in divorce proceedings, it can be more complex if there are two countries to consider. And, even in the UK, the law on pension assets differs between Scotland and the rest of the UK.

European countries also have different pension regulations.

Although French law disallows pension sharing during a divorce in France, if you're in the Netherlands, Dutch law states that pensions should be divided equally between the spouses during a cross-border divorce, unless parties agree otherwise.

Other European countries may allow pension division, but, again, the rules may differ.

This is another good reason to take some time to plan ahead before you start divorce proceedings.

If you live outside the UK, get in touch and we'll help you understand your options and introduce you to a legal professional with the necessary experience and capacity to operate in various jurisdictions.

Rebuilding your retirement plan after divorce

If you lose a portion of your pension savings as part of your divorce settlement, it’s important to start saving to make up the difference as soon as possible.

Your Alexander Peter financial planner can help you visualise what the lost sum will mean for you and your retirement plans and create a plan to help you rebuild your retirement savings.

Likewise, if you had a financial plan before your divorce, it’s a good idea to review your situation after your divorce. Now may be an ideal time to reassess your financial goals, as your future plans likely look quite different, especially if you’re embracing singledom.

Your financial situation and assets will have changed and it’s likely that you may need to save and invest more to achieve your long-term financial goals.

Your planner will help you understand whether you are on track to meet your goals, and if not, help you develop a plan to achieve them.

Get in touch

If you’re going through a divorce or considering one, an experienced financial planner could make a huge difference to both your financial and emotional wellbeing. We can help you to gain some clarity on what your finances will look like post-divorce, giving you confidence to negotiate an outcome that works for you.

Email or give us a call on +44 1689 493455.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate cashflow planning.

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