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Lots of thought goes into combining a couple’s finances. And the longer a marriage, the more finances become entwined.
If they’ve decided on divorce, a lifetime of assets will need to be divided – and not just joint bank accounts and household bills, but also pensions. It can be tempting to ignore pensions, due to their complexity and fears over fees, but the income from these will directly affect future quality of life.Fortunately, there are tried and tested approaches available for couples who need to divide a lifetime of entangled finances; from “sharing” pensions 50/50 upon divorce, “earmarking” funds to be divided at a later date, or “offsetting” – where one person keeps the pension in return for keeping other assets (such as the family home).
For those aged 65 years and over, with pensions in payment, median pension wealth of men is nearly double that of women. Median pension wealth for pensions in payment, for individuals with this type of wealth, by age band, and sex, Great Britain, April 2016 to March 2018.
We spoke to David Yates, Independent Financial Adviser at Wren Sterling, about the support he provides to divorcing clients, “Quite often a divorcee will come to us with a Pension Sharing Order and will want support with the lump sum they are about to receive. They’re often looking for peace of mind knowing that their money is being dealt with properly, as they may not be confident managing their own money, and have now been put in charge of a large lump sum.”
Untying the knot of finances on divorce
It’s not compulsory to share your pensions in divorce. If a split is amicable, the couple may want to avoid the expense of court, making an informal agreement with their now ex-partner. But a court order is unavoidable, as it is needed for any agreement to be enforceable.
Pension Sharing is one option available to couples hoping to have an amicable split, that doesn’t leave either having to ‘start from scratch’ with their retirement plans. Without such agreements, there are fears of retirement poverty for one party, as it is rare to have an even split in the pension wealth, or for pension schemes to be in the name of both partners.
What is Pension Sharing?
A Pension Sharing Order is a type of court order that is used to allow a couple to divide their pension funds on divorce. This is an arrangement that can be flexible – starting with discussions of a 50/50 split, but allowing clients to amend the percentage going to each party depending on the other assets involved (like the family home), or their circumstances. For example, if one person is retired and the other is not.
Once divided, Pension Sharing ensures that the other person no longer has any control over how the funds are used – rather than divorcees continue to be reliant any of their ex-partner’s financial decisions. Funds can be transferred into a new or existing pension – or, depending on the scheme, divorcees may be able to join an ex-partner’s scheme independently.
David says: “We’re often asked to help once the Pension Sharing Order has been produced, and the client has a piece of paper saying, ‘I’ve got this, what do I do?’ Our job is then to look at their circumstances and find a fund that matches your needs and attitude to risk – either to start drawing on now or in the future.”
David adds: “In the majority of cases I’ve been involved with, the divorcees have been in their 50s or 60s, and don’t have much time to build up their pension assets before retirement.
The Pension Sharing Order represents a fundamental part of their income moving forward. They’re not looking to get too technical, and want to feel that they are not alone when setting up their finances”
Where to start when discussing the future after divorce
Detaching our emotions from money discussions is just one benefit an Independent Financial Adviser supporting their clients as they plan their newly separate futures. Not only as a neutral party, but also as a financial expert. Once you have a Pension Sharing Order, the first step to splitting resources is to find out the extent of your own wealth. A Wren Sterling adviser like David can gather information about your plans, investments and even find lost pensions and can work alongside your solicitor to ensure this is all done at the right time.
David says: “A divorce signals a huge change in a client’s circumstances. But this does present an opportunity for them to be in charge of the kind of pension they want. We often discuss more flexible options like Pension Drawdown. Why? Because at this time of their life things can take some time to settle down. If they don’t know what’s happening with their income, expenditure, level of savings, we won’t know what they’re going to need in retirement.
“Pension Drawdown can mean retirees can take funds at any point from age 55 , taking 25% of the pot tax free, taking the rest as income when they want but it would be taxable. The downside to that is that once the pot is gone its gone and they could run out of money. They can either manage their money – or get support from an IFA.”
A clean break with a Defined Benefit pension
A Pension Sharing Order can affect all types of occupational and private pension schemes, including those that are already in payment. The only exclusions are the basic State Pension, and Widows Pension rights. As usual, Defined Benefit pensions (also known as Final Salary schemes) are more complicated. Very few defined benefit schemes are likely to allow the ex-spouse to stay in the scheme, forcing the whole sum to be transferred away.
Sometimes, Pension Earmarking could be preferable, where an amount is ring fenced for the future. But as the final decision for when a DB fund is transferred depends on the named recipient, this is not the ‘clean break’ which Pension Sharing offers.
The PLSA’s Retirement Living Standards can give you an idea of how much you’ll need for the retirement you want
MINIMUM
Covers all your needs, with some left over for fun
Single – £10,900
Couple – £16,700
MODERATE
More financial security and stability and flexibility
Single – £20,800
Couple – £30,600
COMFORTABLE
More financial freedom
and some luxuries
Single – £33,600
Couple – £49,700
Getting divorced in retirement
No one wants the question “Can I afford to get divorced?” to be part of a decision about whether or not to end a relationship. A Pension Sharing Order can be put in place, even if one party’s pensions are in drawdown. This will mean a significant reduction in the expected pension income.
According to the Retirement Living Standards report from the PLSA, retirement is more expensive when you’re not sharing the cost of living. Split pension benefits may no longer provide enough for the quality of life previously anticipated. Divorcees will need to re-calculate how much they think they will receive in retirement – and how much they think they will need.
Setting the date
It’s best practice to wait 28 days before applying for a Decree Absolute to dissolve the marriage. How long each of these processes takes will depend on the complexity of the couple’s situation, and how easily they are able to provide the required documentation.
No matter where you are in the process of a divorce, talking to a Wren Sterling adviser could help you untangle and make the most of your plans. Typically, your solicitor will contact an independent financial adviser if a pension sharing order is required, so it’s worth telling your solicitor that Wren Sterling provides this service.
“How long it will take to set up a new pension will depend on how far along a client is in the divorce process when they get in touch,” says David. “If the Pension Sharing Order has already been settled, we’ll need to get a letter of authority signed by the person who owns the pension to get the information we need about the pension that’s already in place, double check if we’re able to keep the funds in the same scheme, that could take a month or two – depending on how quickly the providers come back to us. It could take eight to twelve weeks to get everything completed.
“But it’s not only pensions we can advise on. Any joint protection plans will be null and void, and insurance is particularly important if there are young children involved, if the divorcee suffers from disability, or is unable to work. They may wish to look at continuing to build on their pension pot they’ve created, and if there’s other parts of the settlement that aren’t pensions – they might look to invest. It’s just a matter of looking at the overall picture and finding what’s possible. In the end it’s just basic financial planning! After all there are lots of people in this situation, and we work with clients all the time to put these plans in place.”
Once the settlement is complete, your Financial Adviser can look at other areas of your finances that have become intertwined. Clients may need to consider Power of Attorney, Trusts, making a new Will, and ensuring that their investments continue to perform well in order to grow and provide retirement income.
This is the first reform divorce law for 50 years, allowing couples to divorce without assigning blame or fault to either party.
The final season of the blame game
The Divorce, Dissolution and Separation Act has been delayed, but should come into force on 6 April 2022. This is the first reform divorce law for 50 years, allowing couples to divorce without assigning blame or fault to either party.
Current rules state that a couple must evidence that they have been separated for two years (if both parties consent to the divorce, five years if not) or provide proof of fault. Even if a party is able to evidence adultery, unreasonable behaviour or desertion, this often has little or no financial advantage in a final settlement.
Even with this amendment to the law, a Divorce Order is still likely to take six months or more to complete. We anticipate that as no-fault divorce rules come into play will see a slight rise in the number of applications, mostly from disappointed couples who had hoped to begin this process 2021.
If you or someone you know is going through divorce, it is always worth having a conversation with an independent financial adviser to prepare you for the financial side of divorce.The value of an investment and income from it is not guaranteed, investors capital is at risk. The Financial Conduct Authority does not regulate taxation advice.