Divorce is complicated on many levels – and how to deal with pensions is one of them.
In many cases, pension sharing is a good route to take. It allows a “fair” split of pension assets to equalise incomes at retirement, giving both parties a clean break and ownership of their own investment and retirement decisions.
As a financial planner, I often work with people who feel on the vulnerable side of this equation – those trying to secure a fair share of their ex-spouse’s pension. Many come with the same questions about how it works. Here are my answers to 10 of the most common ones.
Q1: Are all pensions shareable?
No, not all. The vast majority of pensions can be considered for sharing but, as a general rule, the Basic and New State Pension can’t. Neither can pensions already subject to a previous divorce order or pensions that the member is receiving as a dependant, spouse or civil partner.
Q2: My spouse and I have multiple pensions of different types and values, from simple pots of money to final salary employer pensions. Given the complexities in calculating benefits from these different schemes, isn’t it fairer to split each pension individually rather than using one larger pot?
Anyone advising on the options to split pensions should take into account the benefits and options of each scheme as well as the cost of implementation. Implementing a single order can cost as much as a few thousand pounds (a direct cost to both parties). The more pensions you share, the higher the costs are likely to be.
It’s wise to consider this in the overall picture because the costs can outweigh the potential benefits, especially with small pension pots.
Q3: Do I need to stay in the same scheme as my ex-spouse?
This depends on the rules of the scheme that the credit (i.e. pension award from your ex-spouse) refers to. Unfunded schemes are likely to only offer scheme membership. Other schemes (including funded final salary schemes) are more likely to offer an external transfer and may not offer scheme membership.
Q4: I’ve recently been awarded a pension share from my ex-spouse and I need to transfer it externally. How and when can I take my pension?
You should consider the benefits of transferring it into an existing scheme you have (if available) or setting up a personal pension in your own name. You should then be able to draw your pension – under current legislation – from age 55 (due to increase to 57 in 2028).
Unless the credit was disqualifying, you should be able to take tax-free cash from the pension (usually 25% of the value) and use the balance to purchase an income for life (annuity) or draw income flexibly from invested funds.
Q5: Can I take tax-free cash from a pension credit?
Yes, you can – unless the credit relates to a pension that was already in payment (known as a disqualifying pension credit).
Q6: My spouse and I have agreed a pension share. How long will it take for the pension to transfer into my name?
Once the share of the pension has been agreed and a court order issued, the pension credit usually has to be implemented within four months from the date of the order. The pension scheme will choose a date within this period to value the pension and determine the amount to be credited.
Be aware that this will almost certainly be different from the monetary value calculated during negotiations because the pension sharing order (in England and Wales) specifies a percentage share, not a monetary share.
Q7: Do pension credits count towards the annual and lifetime allowances?
Pension credits don’t count towards the annual allowance (the upper limit on tax-relievable pension contributions). However, pension credits do count towards the lifetime allowance (the maximum amount that can be accumulated within a pension before further tax charges are applied). In some cases (e.g. where credits from pensions are already in payment), it’s possible for the credit member to apply for increases to the allowance.
Q8: Can we agree a pension share without court involvement?
No, a court order is needed.
Q9: Can we agree a pension share if we are not married or civil partners?
No, this isn’t currently possible.
Q10: When in divorce proceedings should I consider pensions?
As early as possible. Pensions are typically one of the most complex assets to value. To avoid delays to the divorce proceedings, it’s a good idea to make sure transfer values are considered early in the process and that you get professional advice about your best options for pension sharing.
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We know that the journey through divorce can be a tough one. As experienced chartered financial planners, we can make sure that the pensions question is one less thing for you to worry about. Contact us or learn more about how we can help you make your retirement goals a reality.
Author: Phil Hasell, Director and Chartered Financial Planner.