Not only does going through a divorce affect you emotionally, but it can have devastating affect on your finances now…. and in retirement. Following a divorce, both you and your ex-spouse will need to divide your assets – including any pension rights.
When you go to court to settle your divorce, the court will take both your and your ex-spouse’s pension rights into consideration. If one of you wasn’t employed (perhaps looking after the children instead) while the other built up a pension pot, then the courts will also have to take this into consideration.
Valuing the worth of a pension as part of a divorce settlement depends on what type of pension scheme is involved. Occupational pension schemes are usually valued according to their transfer value. This is the amount of money that would be moved if the scheme member decided to transfer their pension pot to another pension arrangement. The value for those with a personal pension is determined by the fund value. So the first step to distributing pension rights as part of a divorce settlement is to ask your pension providers for a valuation of your pension fund.
As well as using a solicitor to guide you through the divorce process and represent your interests during the proceedings, you may also want to get independent financial advice to help you understand your options for your pension and what they could mean for your retirement.
Distributing pension rights
While requesting a transfer value or valuation of your pension fund from your pension provider can be fairly straightforward, deciding on how to distribute it can be much more difficult.
You also need to bear in mind that you can’t come to an informal agreement when it comes to assigning pension rights. These have to be done through the courts and can be done in three different ways.
• You can offset the accumulated pension rights against another asset, such as the family home, so that the distribution of the two assets is fairly balanced. This is known as Pension Offsetting and is commonly used in divorce settlements. However, it also means that one party (usually the wife) may be left with little or no pension savings.
• Another method is to earmark a portion of the pension to be paid to the other party when the pension becomes payable. Pension Earmarking means that there is not a clean break between the divorcing parties and the scheme member still has control of the pension. Usually this approach is used for couples in retirement that are divorcing.
• The final option is referred to as Pension Sharing. With this method, the courts will instruct the pension provider to divide the pension fund between the divorcing parties to give them each their own pension pot. This gives the parties a clean break, yet maintains some pension savings for both.
If you are going through a divorce it is vital that you understand the implications of each of these methods and what they may mean for your finances and your retirement. An independent financial advisor will be able to explain and guide you through the process of separating pension rights as part of a divorce settlement and explain how the various options would affect you.
To contact a local independent financial advisor for advice on how your divorce will affect your pension please fill out the form below.