Splitting a pension in a separation – the ins and outs

Did you know that most UK pensions, whether in payment or not, can be shared in the event of divorce. That’s unless you’re the:

• Prime Minister
• First Lord of the Treasury
• Lord Chancellor
• Speaker of the House of Commons

A fun fact for you there! But in all seriousness have you ever thought about what would happen to your pension in the event of a divorce?

They are often the single largest asset aside from the family home, yet pension sharing is rarer than you might think. 92,363 divorces were granted in 2018 but only 11,513 pension sharing orders were made.

Why is this the case?

According to a study by the Nuffield Foundation*¹ it comes down to three issues:

1. Divorce lawyers having a lack of confidence in dealing with pensions
2. Poor information gathering from their clients
3. Repeated changes to pension rules

They also found that many wives felt pressured both financially and emotionally to accept other assets over pensions to avoid further fees and time delays.

What happens to the pensions that do get shared?

Everyone seems to do this differently – the lawyers, the actuaries, the financial advisers and even the judges!

In July this year the Pensions Advisory Group (PAG) – headed by two leading family court judges – published a guide about how pensions should be treated in divorce cases. Your lawyer, your financial adviser and your actuary (if you’ve appointed one to value the pensions) should’ve read it – if they haven’t, and pensions are a significant part of your settlement, find someone who has!

How can pensions affect my financial settlement?

Pensions are a pot of money that produce an income in retirement – they cannot be used in the same way as a straightforward savings account. When it comes to divorce they need to be considered differently; taking a larger share of the family home, for instance, in place of a share of the pension pot may leave you worse off.

Believe it or not there are situations when sharing your pension on divorce could be beneficial for all involved! For example:

Lifetime allowance – If pension savings are over the current lifetime allowance of £1.055m and you haven’t got protection then splitting the pot could avoid a 55% tax charge – yes the spouse sharing the pension will have less but wouldn’t it be better to keep that 55% in the family?

Income tax – We’ve seen cases where a spouse would prefer to pay lifetime maintenance or give their ex-spouse a pension attachment order rather than split their pension pot. In both cases the spouse with the pension is taxed in full on the income and then has to part with some of the net income. Splitting the pot means you will share the income tax burden on the pension income in retirement. Why pay more tax than you should when you could keep more money within the family?

Questions to ask your family lawyer

• Are you familiar with pensions on divorce and have you dealt with them before?
• Have you read the Pension Advisory Group (PAG) report ‘guide to the treatment of pensions on divorce?
• If I need a calculation of the split of the pensions to provide a particular income in retirement who would you use to do that?
• Can you recommend a financial planner who can reality test my financial settlement to see if I can achieve what I want? And help me with taking any actions I need to?

At Cooper Parry Wealth we can help guide you so that you can achieve a settlement that is right for you and your family. And yes, we have read the PAG report!

Please note the following pensions cannot be shared:

State pensions, pensions inherited on death including beneficiary drawdown or any pensions which already have an earmarking order as a result of a divorce.

*¹A Guide to the Treatment of Pensions on Divorce – The Report of the Pension Advisory Group – July 2019