If you’re getting divorced and your husband, wife or civil partner has a pension, it can be divided – or shared – when you divorce. But how is the pension shared and what do happens to your pension after divorce?
Pensions sharing in brief
If you get divorced and one of you has a much larger pension than the other, it can be split, or shared at the time you get divorced. In England and Wales, the person who is receiving some of their ex’s pension will get a percentage of its value. In Scotland, it can be expressed as a percentage or a fixed amount.
SAVVY TIP: If you receive part of your ex’s pension, this share is called a ‘pension credit’. It’s nothing to do with the state benefit of the same name.
In order for the pension to be shared, it must first be valued. This is can be complex, especially with final salary type pensions. The final value of the pension and therefore the amount one partner will get, is only worked out the day before the final court order is made.
Catherine Morgan is a financial planner who offers financial planning and coaching for women at The Money Panel. She says that if you know you’re getting a share of your ex’s pension, it’s important to get help as early as possible. “If the pension is a final salary pension, it may take some time to gather information together about your options – and the information can be difficult to interpret.”
SAVVY TIP: In Scotland, a court order doesn’t have to be used. Couples can agree how much of the pension to share in a settlement negotiated by their solicitors.
How pensions can be shared
There are two options for sharing the pension after divorce or dissolution of a civil partnership.
- You can be given a share of the pension which you must transfer into your own pension or start a new one. You can’t spend this money or put it into a savings account. All private sector and personal pensions have to offer this option. However, public sector schemes do not.
- You can become a member of your husband, wife or civil partner’s pension. This is more likely to be offered to you if the pension that’s being shared is a public sector pension that is ‘unfunded’. This means that today’s workers pay for today’s pensioners. Not all public sector pension schemes are unfunded. If you want to transfer your share of the pension to another scheme, your share will be based on a lower value.
If you’re getting divorced in England or Wales, the pension will be split through a pensions sharing order. Fiona Sharp of Verve Financial says you shouldn’t delay acting once the order has been made. “It is vital to implement a Pension Sharing Order. Do not stick it in the drawer and leave it for later! This can create endless problems down the line, especially if pension schemes close in the future or are transferred elsewhere. You may find that your order is invalid and you may have to go back to court to rectify the situation, and that would involve extra cost.”
The mechanics of pensions sharing
If you’re able to join your ex partner’s pension, you may just have to fill in a form (there will probably be a fee to pay). This can be called an ‘internal transfer’ or ‘shadow membership’. This means your pension will be with the same employer as your ex’s pension scheme, but, says Fiona Sharp of Verve Financial, it may not be in the same scheme.
SAVVY TIP: Many employers have more than one pension scheme these days. Some may be closed to new members, which means that anyone who’s already in the pension scheme stays there, but new employees have to join a different scheme. Others may be more generous and only available to management, for example.
WATCH OUT! If the Pension Sharing Order is coming from a final salary pension scheme, it is important that the trustees are aware of the potential transfer as soon as is viable. This is because the final Decree Absolute means that all spouse’s pensions are lost if the scheme member dies in the meantime. Fiona Sharp says this happened to one of her clients many years ago, and has almost happened several times since.
If the pension share is coming from a defined contribution pension scheme (which is a pension ‘pot’ type of pension, you will have to transfer the money to your own pension scheme or a new one.
Your pension after divorce
Mary Waring, of financial planning firm Wealth for Women, which specialises in financial help for women going through divorce, says that if a divorcing woman already had a pension in place, she would look at the costs the pension scheme charged and what investment options are available. “With that information I would advise her on whether she should add her pension credit to the existing scheme. From an admin point of view if pensions can be amalgamated it makes things so much easier.”
Mary Waring says that she spends a long time discussing risk with women who’ve received a share of the pension. “In an ideal world everyone wants a high return until you explain that a high return becomes a high loss if the markets drop. It’s important for a woman in this situation to get a risk that she’s comfortable with. So it gives a return greater than she would get in cash but without giving her sleepless nights when the market drops.”
She says that part of the discussion also revolves around the client’s priorities: “Does she want to use all her investments to have as much fun in her life as she can, or does she want to ensure there are funds left for her beneficiaries when she dies?” One client’s attitude and needs may be very different to another’s.
What to do with the pension
Your ex’s pension scheme may not let you join it. However, if you do have the choice, you’ll have to weigh up whether to transfer your share of your ex’s pension into an existing pension you have or start a new one. If you are at or nearing retirement age when you get your share of the pension, there are several things to bear in mind:
- When you take your pension depends on the rules of the pension scheme or plan you transfer your pension credit to. It doesn’t depend on the rules of the scheme that your ex was a member of, unless you leave your pension share there. It also doesn’t depend on your ex’s age.
- You can take a tax-free cash lump sum. You can take part of the pension you receive from your ex (up to 25% ) as a tax-free cash lump sum, in most cases. However, you cannot take the tax-free cash lump sum if your ex was already receiving an income or taking money from his or her pension.
- The pension credit doesn’t count towards your annual allowance. This means that you can still pay into your pension from your own money, if you want to.
SAVVY TIP: Everyone gets an annual allowance, which is the maximum amount you can pay into your pension every year and get tax relief. It’s currently capped at £40,000 a year for most people, or 100% of your salary, whichever is lower. If you don’t pay tax, the most you can pay into your pension is £2,880 a year (or £3,600, once tax relief has been added).
Talk to a financial planner
Unless you’re comfortable making decisions about where to put the pension share, this is a good time to talk to a financial planner. Rebecca Aldridge, founder of financial planning firm Balance: Wealth, based in Nottingham (and a member of SavvyWoman’s Directory) says: “It’s a time when it’s vital to take advice from a financial planner because it can be difficult to compare all the options and to see which is best. A professional planner can look at the cost of each pension plan, whether there are any special features or guarantees and if it gives you all the options you’re likely to need.”
Catherine Morgan, from The Money Panel says that having a financial planner involved can also help you make practical decisions at an emotional time.
How to find a financial advisers
Fiona Sharp of Verve Financial has these tips for finding a financial planner who can help you with pensions sharing:
- Make sure that you find an adviser who fully understands the pension sharing process as it can be a bit of a minefield. Resolution (which is an organisation for family lawyers who specialise in non-confrontational divorce) has a list of Specialist Accredited Advisers across the country.
- You can also find an adviser via Unbiased, by adding “divorce” as a specialism
- Most lawyers also have trusted financial advisers that they work with
- If you are not sure, then make an initial appointment with one or two financial advisers, and see who you feel is the best fit. Most advisers offer an initial meeting at their expense. Pension Sharing Orders can take a long time to process (it can be as long as 6-8 months) and therefore it is important that you feel you have the right person assisting and supporting you.
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