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Minimising the stress around pensions and divorce

31 May 2018

Many a comedian has quipped that “Instead of getting married, I’m just going to find someone I don’t like and give them a house.”

But, as anyone who has actually been through a divorce can testify, it is not a particularly funny process. Furthermore, the assets in dispute usually go well beyond the marital home, and pension entitlements tend to figure prominently.

Indeed, a pension fund is typically the biggest or second biggest marital asset. It is therefore crucial that any division of it is done in conjunction with suitable guidance.

Although the government’s free and impartial Pension Wise service can provide useful generic information, more specialised personal financial planning advice may well be needed from a regulated adviser.

Employers are in a good position to help in this respect. Even if they don’t feel they can afford to fund such advice, they can consider splitting the cost with the employee or, at the very least, point them in the direction of a suitable adviser.

Chase de Vere is well placed to assist because, unlike many of our competitors in the employee benefits space, we have our own independent financial adviser (IFA) arm.    

Employers who do help employees during a time as stressful as a divorce are indulging in a certain amount of enlightened self-interest as they are likely to engender loyalty and make the individual concerned less likely to move elsewhere.

They should also benefit their succession planning by reducing the chances of the employee not being able to retire when they want to as a result of being left with insufficient pension assets.

Pensions should be included in the financial settlement if a couple divorces or dissolves a civil partnership – but they cannot be shared if neither form of union occurred.  There are three key ways in which a divorce court can deal with pension assets, and each has its own pros and cons that must receive careful consideration.

Pension sharing, which provides a legal entitlement to a share of a former partner’s pension pot, is arguably the cleanest and least complicated method. Nevertheless, although splitting defined benefit schemes can be fairly straightforward, those receiving assets from a defined contribution scheme must still receive suitable advice on how to invest them.

Another method, known as pension offsetting, offsets the value of a pension against other assets.  It may, for example, be possible for an employee to keep their pension and for their former partner to keep the house.  

But it is crucial that the assets in question are valued correctly, particularly defined benefit pension schemes – for which it is easy to underestimate the value of index-linking guarantees and dependant’s pension benefits.

Another issue with pension offsetting is that those giving away pension assets reduce the size of their Lifetime Allowance, meaning that even someone who is very wealthy may not be able to rebuild their retirement saving tax-efficiently during their later years.

The third method, commonly referred to as pension attachment or pension earmarking, is like a maintenance payment directly from one person’s pension pot to their former spouse or partner. Money from someone’s tax-free lump sum can also be transferred.

But a major potential drawback with this approach is that those receiving the payments are tied to the retirement date of their ex-partner – who may even decide to delay their retirement out of spite to prevent them receiving the money.

Remember that an employee only gets one chance to get their divorce settlement right. So, just as it is important to use an expert lawyer to help with the actual divorce process, it is also crucial to receive the best financial advice on pension technicalities.

Bear in mind also that people can be highly emotional during the divorce process and can be tempted to take knee-jerk decisions that are not in their best interests just to get their previous partner out of their life as quickly as possible. But a good IFA can ensure this doesn’t happen.

If you would like to learn more about how Chase de Vere can help you with complying with your auto-enrolment requirements and satisfying TPR then please do not hesitate to contact us on 0345 300 6256 or complete this simple form and we’ll call you.