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Divorce & dealing with the pension splits

There were 108,421 divorces in England & Wales in 2019 and although divorce rates as a proportion of marriages are at their lowest rate in nearly 50 years, they were up almost one fifth on 2018.

Of course, 2021 could easily continue this upward trend as we’re spending far more time together under one roof, working, playing and perhaps arguing. So if the worst happens in a marriage, what happens to our pensions?

There are three methods by which pension benefits are taken into account on divorce, each with their own considerations.

Offsetting

The oldest and still the most common method to deal with pension benefits in a divorce, Offsetting allows you to balance the value of the pension against other family assets, e.g. “I’ll take my pension, you have the family home”.

It’s attractive when the divorcing couple are fairly young, both working and have no children; or when each party has sufficient assets and/or pension income in their own name not to need the other’s pension.

It’s less attractive when one person’s pension value is high relative to other assets, because it makes the offsetting process difficult. And if the spouse has little or no pension themselves, they will need a replacement pension at retirement.

Legally, courts assess non-pension capital, pension assets and income when deciding how to share a couple’s estate. But with pension freedom rules, there is a blur between capital and pensions which makes it more difficult to predict what a judge is likely to do.

For divorces over the age of 55, a demographic where divorce numbers are rising, there is now complete access to defined contribution pension funds.

Earmarking

This enables an English or Welsh court to tell the pension provider to provide a pension income to the ex-spouse from the date the member draws their benefits.

The only time I feel this is advantageous is when someone (the member) is already in receipt of their pension, albeit the income may stop on the members death.

The reason I don’t like it is because the ex-spouse is dependent: they have no control on when or how they will receive an income, or how the pension investments are managed. It’s also taxed on the tax rates of the person drawing the pension, which may be higher than the ex-spouse.

And it does not provide a clean break, and a clean break usually helps couples move on.

Sharing

Sharing effectively splits the pension and provides the ex-spouse with a pension fund in their own right.

It’s best when the ex-spouse is close to retirement and doesn’t have time to build a pension themselves. And if the ex-spouse is looking to remarry, unlike earmarking, pension sharing is unaffected by this.

Be aware though: if the retention of the family home is key for the ex-spouse, then sharing of the pension may tip the value of assets to such an extent that it is unviable.

For a more in-depth discussion on pensions and divorce, watch the video above.

5 facts about divorce

  1. There were 107,599 divorces of opposite-sex couples in 2019, increasing by 18.4% from 90,871 in 2018
  2. There were 822 divorces among same-sex couples in 2019, nearly twice the number in 2018 (428 divorces)
  3. In 2019, the average (median) duration of marriage at the time of divorce was 12.3 years for opposite-sex couples … while the longest in recorded UK history is 84 years!
  4. The average cost of a divorce is £1,500 – but it can get much more expensive…
  5. …the largest divorce settlement in history was when Amazon founder Jeff Bezos gave his former wife, MacKenzie, a 4% stake in Amazon, at the time worth more than $35 billion.
 

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