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Pensions: What you need to know when you divorce
Divorce or a relationship break-up carries many stresses and strains and dealing with your retirement plans is probably the last thing on your list of priorities. However, being mindful and organising your future this could help in the healing process and lead to a better life.
Many people think immediately about the value of the home when sorting out their money in the event of a divorce; however the value of some pension plans built up over a long marriage can be significant and may be even greater value than the matrimonial home and therefore should not be ignored, just because it is not immediately visible. At such an emotional time it is often hard to look into the future, however, it is Essential that you try to minimise the impact of divorce on your long term wealth and security. Ensure that both parties are treated fairly.
At times of divorce both parties go through many changes to their personal situation and finances, so when seeking out legal representation regarding your divorce, Independent Financial Advice should be considered at the same time to ensure your assets, pensions and savings continue to be invested in the most appropriate manner.
When Solicitors look at pensions that have been built up over the lifetime of the marriage, there are three ways that a pension can be included as part of the divorce settlement, Offsetting, Earmarking and Sharing, each have their own pros and cons for the individuals concerned and these are broadly as follows:
Offsetting - where one partner keeps the pension fund value and the other gets assets in return of equal value, such as the marital home. On the positive side this is often the simplest method and offers both parties a clean break.
Earmarking - where a claim can be attached to either party's pension when the benefits are drawn. When the benefits are eventually paid out, the other party will become entitled to a share of the income and/or Tax Free Cash payment at that time. The pension company holding the fund keeps a record on file, recording the non-members share. The drawback on this type of order is that the non-member has little control over when the benefits are taken as control remains with the scheme member. A further drawback to this is if your ex-spouse were to die prior to retirement or if you were to re-marry (subject to holding company rules).
Pension Sharing – since September 2000, pension sharing has been an option open to divorcing couples. This option allows the courts to order an immediate splitting or sharing of pension funds. This results in the pension 'pot' being divided between each party on a percentage basis. The fund share of the pension fund awarded is transferred into a completely new plan for the other partner. This type of order enables both parties to have complete break and control over their own finances.
There are many websites which you can gather further information however, here at SM & Associates we believe in a personal service and believe it is very important to discuss the options with our clients and their solicitors whilst listening to what you wish to achieve as part of your long term objectives.
Also at the same time, it is important review existing Life Plans and to implement new ones following a divorce, to ensure that you are fully protected for any other of life’s events that may arise as either partner or both may not be covered by spousal benefits such as Bupa, or death in service scheme.
Do consider :
Protection policy – if there are, young children and an ongoing Maintenance Order has been put in place by the court, it is advisable to try to put in place some form of Life Assurance on your ex-spouse which would cover future maintenance payments should they die prior to the end of the maintenance period. (This generally works best if you remain on good terms, if not an agreement between the two solicitors may be advisable). As many life assurance plans are arranged on a Joint Life, 1st Death Basis, it is important to review these plans on divorce and generally new individual plans may be required.
Investments/Savings – many plans may also be dealt with as part of the Financial Settlement relating to the divorce. At such time any awarded to you as part of your settlement should be re-assessed so that these now work in your best interest.
Independent Financial Advice is extremely important when couples are divorcing, here at SM & Associates we are happy to work with you and your solicitor to ensure that you experience the best outcome possible for yourself.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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