31 May 2023
Advice from a professional can help ease the burden when dividing pensions during a divorce. Lumin Wealth’s pensions on divorce expert Simon Ricca explains more.
Divorces can be a stressful and complicated time for both parties, but seeking financial advice on your pension options can help you save money, streamline the process, and reduce some of the worry.
Pension assets in a divorce
According to the Matrimonial Causes Act 1973, the value of both parties’ private pensions form part of the overall distribution of assets when a couple go through a divorce. This typically includes all your private pensions, not just assets built up during marriage. State Pensions can’t usually be shared.
Splitting pension assets
When dividing the pension pots of the respective parties, pension sharing is often the go-to option. A percentage share of one person’s pension(s) is transferred to the other, in order to equalise assets. This is often a favoured option as it provides a clean break between the parties.
Another less common method is known as offsetting. This sees the receiving party take less of a percentage pension share in favour of non-pension assets, such as cash or property.
Offsetting can be an attractive proposition if one party requires an immediate cash injection. However, appropriate liquidity is required.
Defined benefit pensions
A defined benefit pension plan has benefits built up over time depending on your salary and years of service as an employee. A cash equivalent transfer value is used to assess the cash value of the plan’s benefits at divorce. A cash equivalent transfer value quote will often not be an accurate reflection of the plan’s true value. It can be as much as 50% below ‘fair value’, or the true cost of replacing the pension benefits in the open market.
If one party has a defined benefit pension it is important to seek a pension sharing report from a qualified financial adviser
A report will provide a detailed breakdown of your
options, with the aim of ensuring equality of income in retirement for both parties.
Hidden complications and pitfalls
There are sometimes a number of other hidden complications. For example, older pension schemes can contain certain options, such as guaranteed annuity rates offered by an insurance company. This could mean that your pension is actually more valuable than the cash equivalent transfer value quoted by the pension company. Significant age differences and serious medical conditions can complicate the picture. A pension sharing report will
summarise such issues and outline the available options.
Planning for the future
Once a decision has been reached on the division of pension assets, a financial adviser can help to arrange a pension transfer. They can also provide ongoing financial planning advice.
For example, a long-term cashflow forecast will analyse expenditure and lifestyle, allowing you to effectively plan and budget for your new way of life. A financial adviser can also outline investment opportunities if you have received a cash lump sum as part of the division of assets.
A pension sharing report from an expert can allow you to understand and assess your options during a divorce. Lumin Wealth’s sister firm, Lumin Pension Services, provides
simple and streamlined pension sharing reports that are produced much faster than the industry average. To find out more please call 03300 564 446, or get in touch via our contact form: https://luminwealth.co.uk/contact/
