Major life changes, like divorce, can provide a good reminder to look again at your finances and longer-term financial plans, including pensions. Your income and outgoings may have changed significantly as a result of the divorce. This may affect how much you can contribute to your pension, and affect your future retirement plans - from what you were planning to do in later life to how much money you expected to have.
Your pension may have been split as part of the financial settlement in the divorce. This could also trigger changes to your pre-divorce retirement plans.
How can assets be split on divorce
Firstly, these are the five main ways used to divide pensions at divorce:
Pension offsetting
This is when you use the value of your pension to offset other assets, such as property. Pension offsetting could allow you to keep your pension, for example, while your former partner is awarded a larger share of another asset such as your shared home.
Pension Sharing Order (PSO)
A Pension Sharing Order lets you take a percentage share of your former partner’s pension pot straightaway. It provides a clean break and you can either join their pension scheme or transfer your money to a scheme in your name.
Pensions attachment order
Also known as ‘pension earmarking’ in Scotland, a pensions attachment order is when some of your pension’s paid to your former partner, usually when you start to withdraw it. Unlike some of the other options mentioned above, this doesn’t provide a clean break as one partner’s reliant on the other to begin drawing their pension.
Deferred lump sum
This is similar to a pension attachment order and enables you to receive a lump sum when your former partner retires. It’s not available in Scotland, but can be used anywhere else you divorce in the UK.
Deferred pension sharing
If there’s an age gap between you and your former partner, and they are already drawing a pension, you can apply for a Deferred Pension Sharing Order which allows the younger party to delay taking their pension entitlement until they reach pension age. This option isn’t available in Scotland either.
If both you and you and your former partner have retired, pensions can still be split, however it won’t be possible to take a share as a lump sum.
People are getting divorced later in life. The average age is now 46.4 for men, compared to 47.4 in 2019 and 43.9 for women compared to 44.8 .As people divorce later, they have less time to build a retirement income – especially if they don’t have a pension of their own. It’s therefore vital not to leave pensions off the table during a divorce to avoid pension poverty.
How to deal with your pension plans after divorce
Future life plans
The future you imagined when you got married may look very different now. Take some time to reimagine what your new ideal retirement looks like, and how that’ll be achievable and affordable post-divorce. Will there be more or fewer exotic holidays? You may have had to move to a smaller home, perhaps in a different area, leaving friends and hobbies behind, how will you replace them?
Retired spending requirements
You probably had a figure in mind for how much you’d likely need to live comfortably in retirement. After a divorce you may have additional or fewer financial responsibilities. How will this affect how much you need when you retire?
Retirement age
Think about the retirement age you’d previously intended. If that still seems achievable, and desirable, then it can stay the same. If not, change it, and account for the knock on effects to the rest of your retirement plans. Can you scale back your expenses and retire earlier? Or will you need to work for longer?
Target pot size
Depending on how the financial assets in your marriage were split, your pension pot may have increased or fallen in size. If your pot’s now smaller than you thought it’d be at this life stage, you may have to scale back your retirement plans. Alternatively a divorce may have freed up more or your retirement income, as you now only have to take care of yourself, meaning you have more than enough in your pot to live a luxurious later life. Whichever it is, you need to adjust for it in your financial planning and tend to your pot as required.
Regular contributions
All of the above will affect whether your current pension contributions need to change. To achieve your new goals, you may need to increase your pension contributions. Alternatively you may have scaled back your plans and won’t need to contribute as much. It’s important to know where you stand and make any adjustments as soon as you can to ensure you have ample time to grow your savings, if necessary.
Women – beware the pension divorce trap
Women in particular can lose out in terms of pension entitlement in divorce. Usually the lower earner, and with less in pension savings due to time out of the labour market to raise children, women often plan their retirement by relying on joint finances with their spouse.
On divorce, pensions should still form part of the financial settlement to account for this, but many women miss out. Three in five women didn’t get a share of their ex-spouse’s pension in their divorce, a survey by law firm Stowe Family Law found in June. Another 12% were not sure whether they did or not.
Experts are warning this problem of women not getting, or being aware they are entitled to, a rightful share of their ex-spouse’s pension, could get bigger with the introduction in April of ‘no fault’ divorces. The Divorce, Dissolution and Separation Act (2020) means a spouse, or a couple jointly, can now apply for a divorce by stating their marriage has broken down irretrievably. It removes the need for either party to unnecessarily blame the other for the end of the marriage.
But there is concern these ‘quickie’ divorces, in which the couple themselves do much more of the paperwork, will neglect proper sharing of pension assets. Family Law Court statistics including pensions show there were 116,612 petitions filed for dissolution of marriage in 2019, but only 13% contained some sort of pension settlement order.
Laura Miller is a freelance financial journalist.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
