Pensions and divorce
By Sarah Wilson-Trainor
I often work with clients who are either going through a divorce or have already divorced. My top piece of advice? Consult a Financial Planner as early as possible.
A Financial Planner can help you understand the impact of your settlement agreement and guide you through the implications of different scenarios.
This isn’t about being greedy or trying to take everything from your ex. It’s about securing your long-term financial future. It can be easy to focus on immediate needs and a quick, clean break, but this can cloud your judgment and affect your future.
Divorce settlements consider all assets owned by both partners, and pension pots can be a significant part of these assets.
A common scenario is the higher earner offering a cash settlement in exchange for keeping their full pension. If you’re not familiar with pension rules—and most people aren’t—you could make a decision that significantly impacts your future income.
Pensions can be more valuable in the long term than a house, cash, or investments of the same value.
Here’s a simplified example: splitting a house worth £500k, investments worth £500k, and a pension worth £1 million might seem straightforward. Why not give one partner the house and investments and the other the pension pot?
Here’s why:
- A pension provides income in retirement when you can no longer work; it’s a tax-efficient way to save and ensures a steady income flow in your later years.
- A cash settlement is often reduced by financial support to the family. A share of a pension isn’t accessible until age 55 (57 from 2028), so it’s reserved for retirement.
- You can’t “catch up” by paying a large cash settlement into a pension due to annual contribution limits.
- Without a pension, your income after age 55 or 57 from 2028 is much less secure. You might need to sell property, liquidate investments, or rely on savings.
In short, consider both your short-term needs and long-term requirements.
If you receive a pension share as part of your divorce, it’s crucial to get advice on what to do with it. Ensure it’s in the best place for you based on your needs. A good Financial Planner will look at your overall financial situation and lifestyle goals.
In summary, if you’ve relied on a spouse’s pension, you’ll need a new plan based on your changed circumstances. A good divorce lawyer will aim for a fair share of the pension in any settlement. A Financial Planner will help you understand your income needs now and in the future and how best to organize your finances and divorce to support this.
This blog does not constitute financial advice.