How might your pension be affected during a divorce?

A divorce can affect your finances, your lifestyle, and your mental health but, can it also affect your pension? In this article, we’ll be looking at how might your pension be affected during a divorce.

Going through a divorce can turn your world upside down and affect every aspect of your life from childcare to where you live. Your finances can also take a knock as all assets can be affected during the divorce proceedings, including your pension.

In this article, we’ll be looking at ways in which you can protect your pension when going through a divorce.

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What is a Pension and How Does it Work?

A pension is, essentially, a savings pot that is built up over time in order to give you an income once you retire. In the UK, a state pension of £185.15 per week is paid to those of retirement age as long as they have paid taxes during their lifetime.

Many people also receive a pension through their employment as, under UK law, employers must offer their employees a pension scheme to which both the employer and the employee contribute. Finally, UK citizens may also choose to take out a private pension which they alone contribute to.

How Does a Divorce Affect a Pension?

If you are married or in a civil partnership, your pension may be considered an asset and may, therefore, have to be shared with your partner.

Here, the rules are slightly different in England and Wales than in Scotland. In this section, we’ll be exploring how your divorce may affect your pension depending on where you live:

Pension Rules for England and Wales Residents

If you live in England or Wales, your partner may be able to claim part of your pension following a divorce. A court will calculate the total amount of pension funds for each partner and this will include any and all pension funds accrued before and during the marriage.

This means that your partner may be entitled to a cut of a pension that you opened or joined before you met.

Pension Rules for Scottish Residents

As with England and Wales, the division of pensions will be calculated by taking into account pension funds held by both partners.

However, in Scotland, this will be limited to pensions that were opened during the marriage and will not include pensions that began prior to the marriage.

Can You Protect Your Pension During Divorce?

While your partner may be able to claim your pension in the UK, there are a couple of ways in which you can protect your pension should you feel that you have grounds to do so. These grounds can include:

A financial settlement

During and after your divorce, your partner will almost certainly have the right to make a claim on part of your pension, which can be unsettling and stressful to think about.

One solution is to try to reach a financial settlement with your partner whereby you offer him or her a cash sum with the understanding that no claim will then be made on your pension either now or in the future.

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Pension offsetting

Whatever your current circumstances, your pension will often represent security for your old age, no matter what happens with your current finances or investments. For this reason, you may want to opt for pension offsetting.

Pension offsetting is where you offer your former spouse an alternative asset such as property, stocks, shares, or another item. Essentially, this will ‘offset’ the loss that they feel that they may be suffering by not taking a share of your pension.

In this instance, it’s important to carefully consider the value of your pension and the value of other assets as your pension may be considered to be lower in value.

Additionally, tax is payable on your pension at the time of drawing, so this will also need to be taken into account in terms of value. You may consider hiring a financial advisor to help you to calculate the amount of tax.

Negotiation

During a divorce, many assets are divided on a 50/50 basis. However, this doesn’t necessarily have to be the case when it comes to your pension, a court will assess this based on a number of factors including:

• Each partner’s income and potential future earnings
• The length of the marriage
• The financial responsibilities of each partner
• The requirements of any children
• Any additional assets, including property, stocks and shares, and other items such as vehicles

Because of this, it’s a really good idea to negotiate the claim with your partner to see if you can reach a fair and mutual agreement.

Sharing is Caring

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Consider what is ‘fair’ during divorce proceedings…

By its very nature, divorce can be combative and stressful and, it can be extremely frustrating when your partner is able to claim assets, especially if you’ve ended on bad terms.

Despite this, it’s important to consider the fairness of sharing some of a pension with an ex-spouse who perhaps took time out of work to raise children, for example.

As well as following the tips in this article, if you are not yet married or in a civil partnership, it may be worth considering a prenuptial agreement in which the terms of the sharing of your pension are stated clearly.

A good family solicitor can help you to draw up such a document as well as help you to navigate the complexities of pension sharing should you find yourself going through a divorce.

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained financial professional. Be sure to consult a financial advisor if you’re seeking advice on your pension. We are not liable for risks or issues associated with using or acting upon the information on this site.