Divorce and pensions: how a financial planner could help you share your retirement savings

One very important, but often complex, part of divorce is dividing your wealth. 

Taking financial advice during a divorce could help you split your assets and start this new chapter with financial peace of mind, but sadly, most people don’t take advice during a separation. Money Marketing reports that just 7% of those who have gone through a divorce took financial advice, but 40% say they did not leave the marriage in an “equal financial situation”. 

Seeking advice could have several benefits for divorcing couples, including helping you to look at all your assets and come to an agreement that satisfies both parties. Property, cash, and investments are often the first shared holdings placed on the table – and while these are essential to discuss, there’s one asset that is often overlooked by divorcing couples: pensions.

Your pension may be one of the most valuable assets to your name. In fact, when combined with that of your spouse, your collective pension wealth could even be worth more than your home.

Read on to find out why it is so important to discuss pension sharing in a divorce, and how a financial planner could be of great help.

Leaving pensions out of divorce proceedings could affect your retirement security

It’s important to understand that leaving pension discussions out during a separation could throw your financial stability into question later in life, especially if you are a woman. 

Indeed, Legal & General found that while both parties normally leave a marriage with less money, women usually see a 33% decline in income after divorce, whereas men see around an 18% income decrease. 

Often, women may take the family home in a divorce, especially if children are involved, which means pensions may be offered to the man in order to balance the assets they split. 

Although women are typically at greater risk of sacrificing essential pension wealth in a divorce, anyone can be affected by an unequal division of pension wealth.

Worryingly, PensionsAge reports that between January 2016 and August 2022, fewer than 1 in 8 divorcing couples split their pensions. Yet there are a number of ways to do so that could suit both of you, so let’s take a look at a few common pension sharing options for divorcing couples.

3 popular pension sharing routes for divorcing couples

Here are three popular pension sharing options that separating couples often consider.

1. Splitting pensions equally through a Pension Sharing Order 

During a divorce, the court may issue a Pension Sharing Order (PSO) that requires both parties’ pensions to be split equally.

A PSO is usually expressed as a percentage of the transfer value one party is set to receive. 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.

This option offers couples a clean break, and helps to ensure that both parties maintain their retirement security for the years to come. 

2. Offsetting

This option involves offsetting the value of a pension against other possessions you have as a couple. 

For instance, if your pensions were worth a total of £400,000 and your property was worth the same, one person could take your home and the other could receive both parties’ pension funds.

As you read earlier, offsetting is designed to form an equal split at the time of divorce, but does not account for investment performance or market fluctuations that could affect each person’s finances later.

Crucially, it also means that the party who receives property in exchange for their pension may need to begin their retirement savings again from scratch. Otherwise, they may later be required to sell their home in order to fund their retirement.

3. Earmarking

Earmarking a pension in a divorce means that, rather than splitting the assets up now, part or all of one person’s pension is reserved for the other person’s retirement.

Although helpful down the line, this does mean that one party won’t receive as much capital at the time of divorce. They are also beholden to the other party’s retirement timeline, meaning that they must wait until their ex-spouse takes their benefits to receive the agreed-upon lump sum or income.

A financial planner could help you ensure your future is protected during a divorce

You might be wondering: “What role could a financial planner play if my marriage were to end?”

Firstly, an experienced financial planner can provide far more than wealth advice – although this could be crucial when you are separating from a partner or leaving a marriage.

As a financial planner, I can: 

  • Review your (and your partner’s, if appropriate) wealth circumstances before you divorce
  • Offer advice on how your financial plan might need to change if you return to having a single income, using cashflow modelling software to project your new circumstances
  • Look at how a division of key assets like pensions and property might affect your financial stability both now and in the long run
  • Help you to make data-driven financial choices in an emotional time
  • Continue to act as a guide when you begin splitting your assets
  • Offer ongoing financial planning support as you enter a new chapter of your life. 

To find out more about what you have read here, email me at a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123. 

Please note

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

All contents are based on our understanding of HMRC legislation, which is subject to change.

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 performance. 

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.  

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