According to figures published by the Standard, more than 2 in 5 (42%) marriages in the UK end in divorce.
The average length of marriage in the UK at the time of divorce for opposite-sex couples is 11.9 years, while the average UK divorce age is 43.9 for women and 46.4 for men.
Separating from your spouse or partner can be an emotive and stressful time. As well as making arrangements for children, finding new living arrangements, and going through the legal process, you will also have to negotiate a financial settlement with your ex.
Agreeing a fair division of assets is likely to be one of your main priorities. Despite this, and the fact that PensionsAge reports that they represent 42% of household wealth on average, pensions are often overlooked when it comes to a financial settlement.
Making sure you divide pension assets equitably can help to support both parties in later life – so read on for three reasons not to forget pensions if you divorce.
- Many couples simply fail to consider pension assets
Pension wealth will often make up a significant proportion of your joint assets. And yet, the Times reports that more than two-thirds of divorcees had not discussed their pensions during divorce proceedings.
While an equitable division may not be 50:50, failing to even consider the value of pensions in a settlement can leave one party significantly disadvantaged.
There are three common ways to divide pension assets on divorce:
- Pension sharing – here, the court would make a Pension Sharing Order outlining specifically how pension assets should be divided. It provides a clean break as the values are determined when you separate.
- Earmarking – the spouse without a pension (or the smaller fund) receives a lump sum and/or income in the future. This can cause problems as the party in receipt of the benefit has no control over when it is paid – they must wait for their ex-partner to draw benefits before they receive their share.
- Offsetting – pensions are “offset” against other assets. For example, one party may keep a £500,000 property while the other retains £500,000 in pension wealth. While this may seem fair, it can leave the party who takes the property with little or no income in retirement.
Seeking professional advice from a financial planner can add real value. A planner can use cashflow modelling to determine what your financial position looks like after a proposed settlement and can help you to set up a pension to accept any share you receive.
- It can contribute to a significant gender pension gap
While the gender pay gap has narrowed in recent years, there remains a significant imbalance between the pension wealth held by men and women.
Official government figures say that the gap is as much as 35%, when considering the percentage difference between female and male uncrystallised median private pension wealth around the normal minimum pension age for those individuals with private pension wealth.
Legal & General put this more starkly. They say that women’s pensions at retirement are half the size of men’s (£12,000 versus £26,000), regardless of the sector they work in.
There are many explanations for this, from a remaining gender pay gap to the fact that women are much more likely to take a career break and miss out on several years of pension contributions.
Divorce is another key contributor if pension wealth is either overlooked or the female party “offsets” other assets against pensions.
Indeed, the report in PensionsAge found that 3 in 4 divorced women admitted to not talking about pensions as part of their settlement.
Failing to share pensions fairly on divorce can exacerbate an existing gender pension gap. So, it’s vital that you consider all assets when reaching a financial settlement.
- The abolition of the Lifetime Allowance is great news if you have larger pension funds
Having removed the Lifetime Allowance (LTA) tax charge in 2023/24, the government will abolish the LTA in the 2024/25 tax year.
When a couple have used a Pension Sharing Order to split pension assets, this has typically counted towards the receiving spouse’s LTA. Simultaneously, the person making the pension credit will experience a fall in their pension benefits when tested against the LTA.
So, someone with an existing pension of £900,000 receiving a pension share of, say, £400,000 would have seen their fund exceed the LTA, leading to a tax charge when they came to draw the funds.
Previously, this led to increased complexity when it came to pension sharing, as any LTA tax charge had to be considered when determining how pension funds would be split on divorce.
Consequently, the abolition of the LTA is great news if you are divorcing, and one or both parties have larger pension funds.
You now have no upper limit on the amount you can accrue without losing 25% of the value of the fund above the LTA to tax (if drawn as income) or 55% (if drawn as a lump sum).
The result is that it’s possible for both parties to agree a fair split of pensions without concerns about additional LTA tax charges.
Get in touch
If you are separating and would like advice on your options when it comes to dividing pension wealth please get in touch.
Contact [email protected] or +44 7514 659983
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.