I frequently deal with clients who are divorced or in the process of getting divorced and the one piece of professional advice I’d give is this: Talk to a Financial Planner at the start of the process or as soon as you possibly can.
A Financial Planner can help you to understand how the settlement agreement will affect you and will talk you through the implications of each scenario.
This isn’t about financial greed or taking your ex to the cleaners. It’s about helping you consider your long-term financial security. It’s tempting to think of your immediate needs and getting a quick, clean break, but this may cloud your view and ultimately affect your future. A settlement will consider all the assets owned by both partners in a relationship. In particular, pension pots can make up a significant proportion of a person’s assets.
A typical scenario is for the higher earner to offer a cash settlement to their partner in exchange for keeping their full pension. If you’re not familiar with pension rules – and most people aren’t aware of the detail - you’re in danger of making a decision that could have a considerable effect on your income in your later years.
A pension could be more valuable in the long term than a house, cash or investments of the same value.
In simple terms, sharing a house worth £500k, investments of £500k and a pension worth £1million can appear straightforward. Why not give one partner the house and investments and the other the pension pot?
- A pension gives you income in retirement when you can no longer work; it is a tax-efficient way to save and is a secure way of ensuring a steady flow of income in your later years.
- A cash settlement is often reduced by giving financial support to family. A share of a pension is not accessible until age 55 so can be used for retirement.
- You cannot play ‘catch up’ and pay a generous cash settlement into a pension. There are rules around how much can go into a pension pot each year.
- Without a pension, your income after age 55 is much less secure. You may need to sell property to access equity, sell investments or be reliant on savings.
In short, it is important to consider both your short-term needs but also your long-term requirements.
If you do receive a pension share as part of your divorce, it’s crucial that you take advice about what you should do with it. This involves making sure it’s in the best place for you based upon your needs. A good Financial Planner will look at your situation holistically and base their advice on your overall financial position and lifestyle objectives.
In summary, if you’ve had the security of a spouse’s pension, you’ll need a new plan based on your change in circumstances. A good divorce lawyer will generally look to ensure a share of pension in any settlement. A Financial Planner will help you understand your income requirements, now and in the future and how best to organise your finances and divorce to support this.