BLOG: Divorcing pensions from the lawyers
Over the years I have worked both as a financial adviser and for pension providers and have often been shocked that the fist we know about a client’s divorce is when the paperwork is presented. The reason I am shocked by this is that the need for financial advice, especially when it comes to splitting a pension, is imperative during the divorce process.
Not taking good financial advice and leaving it to the lawyers to make suggestions regarding complicated legislation with potentially significant tax implications, can have a very detrimental effect to the long term financial security of both parties.
Giving half of the pension away to the ex-spouse – who may have been looking after children rather than working and building up a pension in their own name – is often seen as the right thing to do. But what is half a pension worth? You need to take into account issues such as health, age and sex when determining a fair split, even if annuities no longer look at gender. It is unlikely that splitting the monetary value of the pension down the middle will be fair to either side.
In addition, in April 2006 there was a change of legislation for pretty much all pensions. What it meant was a whole host of rules and protection to ensure that pensions built up before 2006 were not penalised. By splitting these pensions there could be a significant knock-on effect to how much both sides can continue to save to either rebuild the pension they have given up or protect what they already had in their name. Involving an adviser is essential if you have primary, enhanced or fixed protection in association with your pension but even without these there are other issues that can arise that need careful consideration.
This is a very complex area that specialist advisers can help with and ensure that the recommendations made for the pensions will not result in a less than satisfactory outcome and you get what you are expecting at the end of the day.
Financial advisers need to be involved very early on in the process. Although in some cases it is possible to go back to court in order to amend what has already been put in place, this will mean further cost and more time wasted.
Ways to spilt pensions on divorce
‘Earmarking’ – the pension stays in the name and under the control of the original owner and they have to pay the ex-spouse a percentage of the income when they choose to start taking it. The ex-spouse has little or no control and will receive the income less income tax based on the original owner’s tax rate.
‘Sharing’ – the pension is actually given over to the ex-spouse to do with as they see fit, giving them more control. They will be taxed on the income at their rate as and when they choose to take it.
‘Offsetting’ – other assets are used to offset the value of the pension, for example, a house.
Claire Trott is head of technical support at Talbot and Muir.