Many of us take the New Year to heart, resolving to improve things for ourselves by committing to better diets, more responsible spending and sometimes – for those in relationships – to splitting up.
Perhaps it’s chasing a perfect ‘chocolate box’ Christmas that puts too much strain on some whose marriages are already struggling, or couples have chosen to delay things until they can’t hold off any longer, but whatever the reasons, the spike in divorce filings after the festive period is so high that family lawyers have dubbed the first working Monday in January ‘Divorce Day’.
It’s usually an emotional time, and even when couples decide to divorce by mutual agreement, they can still experience grief and regret.
Then there’s the practical and financial side to navigate, which involves figuring out how to divide assets and property fairly.
There’s no ‘one size fits all’ divorce
One thing is sure – there’s no single ‘one size fits all’ experience.
Divorce can be relatively straightforward if a couple has no children and few assets. But it can be complicated and time consuming to untangle household affairs when a couple has built up a substantial portfolio of property, personal assets, investments or pensions over time
The average age of divorce has risen to the mid-40s, around six years higher than it was 20 years ago. And that means it’s more likely those couples divorcing have more assets between them.
Your pension could be your most valuable asset
You might assume that the most valuable household asset is always going to be the family home. But in fact, sometimes the most valuable asset is a pension.
The average UK house price is around £235,000. Meanwhile, the average transfer value for a £10,000-a-year defined benefit pension for a 55 year old was over £250,0001.
And more people have pension money to take into consideration with a record number of people now saving into workplace pensions.
First things first – find out what everything’s worth
Because pensions can be such an important and valuable asset, one of the first things that couples who are splitting up will want to do is check their value.
It’s helpful to create a list of all the pensions each partner has and get a copy of the rules of each of these schemes, together with current values, from your providers. You can review and manage any Standard Life plans online using the dashboard or app.
It can be time consuming to gather all the information you need, so allow plenty of time to get valuations.
Pensions and divorce – understand your options
There are three main ways to deal with pensions in divorce – offsetting, sharing and earmarking. Here’s how they work:
1. The clean break option – ‘offsetting’
Known as ‘offsetting’, pensions are included in the marital asset balance sheet but other assets are shared to address any imbalance in pension values between the couple. For example, one party may keep their pension whilst the other party gets the marital home.
This can offer a simple, clean break which doesn’t interfere with existing pensions.
2. Pension sharing
Part of one person’s pension is transferred to the other, giving them additional pension rights. This means they then have full control over how they invest that share and when they choose to access it.
This option also offers a clean break but bear in mind that you can’t share separate life cover and death benefits.
3. Pension earmarking
Less common than it used to be, this is where a partner keeps their pension savings, but agrees to pay a portion of their retirement income to their ex-partner from the date they start to take it. While it keeps things simpler, as no cash actually changes hands on divorce, it doesn’t offer a clean break.
That’s because the partner who owns the pension still controls when it is accessed. The pension is taxed as their income, with some of the after tax income then being passed to their former spouse.
If you’re considering this option then the tax position of both parties needs to be taken into account when establishing the percentage to be earmarked. Otherwise the person receiving may end up with less than they expected because of the tax status of their ex-partner.
There’s also a lack of security because it’s the ex-partner’s pension and the income stops when they die. If the person due to get the pension money remarries or dies first, the full pension reverts to the ex-partner, with nothing for the recipient’s family.
Remember to think about tax
Tax may influence the option you choose, and it could be a good idea to get some financial advice for your own circumstances.
If you don’t have your own adviser, you can find one in your area on unbiased.co.uk. Or visit the Standard Life website for more information about financial advice and 1825, Financial Planning from Standard Life2.
Nominate or update your beneficiaries
One important thing to understand, especially if you’re divorcing, is that your pension savings aren’t normally covered by your Will. You need to nominate or update who you’d want to benefit from your pension savings on a pension beneficiary form, which you can get from your provider. Read more in this guide to passing on your pension wealth tax efficiently.
Self-care and staying the course
During a major life event like divorce, making important financial decisions about pensions as well as other legal matters can feel challenging, to say the least.
To cope with stress in times of change, it can help to rely on a supportive community of family and friends, maintain healthy eating habits, get enough rest, and build time for regular exercise into the daily schedule to sustain a sense of balance.
Understanding your choices around pensions can also help – and good legal support can prove invaluable.
For more information about pensions and divorce, visit the Money Advice Service (MAS) website. It explains the various ways that pensions are treated in divorce and more on smart financial decision-making during all of life’s phases and stages.
1 Figures from XPS Pension Group Pension quoted in ‘Transfer values hit record high’, Financial Times, August 2019.
2 1825 is a trading name for the Standard Life Aberdeen group’s advice business.
The information here is based on our understanding in December 2019 and should not be taken as financial advice.
Laws and tax rules may change in the future and your own personal circumstances will have an impact on tax treatment. Pensions are investments and their value can go down as well as up and may be worth less than was paid in.