3 important ways to keep your retirement plans on track if you’re divorcing

Woman looking out of windowAccording to the Financial Times, aside from the economic turbulence and soaring cost of living, there may be another reason 2022 will be remembered as a challenging year. The year also saw a surge in divorce applications.

It reveals that in Q2 of the year, there was a 22% increase in applications when compared to the same period in 2021. In Q3, there was a further 8% increase. The article also makes an important point if you’re divorcing or considering it: make sure you address any financial issues early in the process.

This may be more important since the introduction of “no fault” divorces in April 2022. These mean that couples no longer have to provide a fault-based reason to separate, or wait a lengthy amount of time before starting divorce proceedings.

While this could help to streamline the divorce process and reduce acrimony, it could also undermine the sharing of assets in a fair way.  As a result, pensions may not be shared out properly, which could leave one ex-spouse financially vulnerable later on in life.

A financial planner could ensure that you get the pension settlement you deserve, so that you can look forward to the retirement that you dream of. Before we look at three ways a financial planner could help with this, let’s look at why so many divorcees may be putting their retirement at risk.

Many divorcees forego their right to an ex-spouse’s pension

Research by Which? suggests that only 15% of divorcing couples included pensions in their financial settlement in 2021, even though pensions are a “marital asset”. This means that legally they should be shared during a divorce, regardless of which spouse owns it.

As divorces can be emotionally draining, it’s understandable if you feel as though you don’t have the energy to tackle the complex issue of pensions. Yet not dealing with them might result in financial vulnerability when you retire, depriving you of the lifestyle you want.

This could be particularly true if you intended to rely on your former spouse’s pensions in retirement. According to PensionsAge, 39% of women and 23% of men expect to do this. With this in mind, let’s now look at three important ways a financial planner could help ensure that your divorce does not cost you the retirement you dream of.

1. A planner can confirm the value of your household’s pensions

According to interactive investor, while 60% of people view the family home as an important asset, just 23% see pensions as one as well. Yet data from the Office for National Statistics (ONS) reveals that pensions made up a greater proportion of household wealth than property between April 2018 and March 2021.

Working with a financial planner will help you understand the total value of your household’s pensions and how much income you could expect in retirement if they’re shared fairly. Furthermore, a planner could help you and your former spouse find any lost pensions that could help boost the settlement you receive.

According to inews, in January 2023 the value of “lost” pensions was valued at around £26.6 billion, and your ex-spouse’s might be included in that figure.

2. They could help you understand your options

Once the value of your pensions has been confirmed, a financial planner can explain the different ways they could be shared between you and your ex-spouse. Typically, there are four ways to do this:

  • A Pension Sharing Order (PSO) – this is where a court decides how the pension should be split, and any amount you receive will be treated as your money. As a result, you have the option to transfer the pension if it’s the right option for you.
  • A Pension Attachment Order (formerly known as “pension earmarking”) – this redirects part or all of a pension to the ex-spouse when that pension is due for payment, which may include part of its tax-free lump sum. This usually means you won’t receive anything until the pension holder starts to take an income. Previous earmarking orders issued in England still apply.
  • Pension offsetting – this is where one ex-spouse accepts marital assets to a similar value to the pension, allowing the other to keep it all for their retirement fund. This might mean, for example, that you keep the marital home in exchange for your share of the pension. While this may sound like a good option, care should be taken. If you struggle financially to run and maintain the property, you may be forced to sell it.
  • Deferred lump sum – this is where both parties agree to share the pension at a later date, which typically makes it a much more complicated option.

A planner can also help you understand which could be the best option for you, and develop a financial strategy that could ensure you can look forward to a brighter financial future.

3. A planner could create a financial strategy

Working with a financial planner will help you reassess your household finances, savings, investments and pensions post-divorce. As a result, they can create a financial strategy to help you get the most from your finances both now and in the future, something that could help ensure you enjoy the retirement lifestyle you want.

As such, a financial planner could help you to:

  • Understand your pension options, which may include boosting your contributions or switching it to another provider
  • Inflation-proof any lump sum settlement you receive, or expose the money to greater potential growth, so that it retains its spending power for when you retire
  • Understand how much income a lump sum settlement could provide using sophisticated cashflow modelling, and whether it’s enough to maintain the lifestyle you want.

Get in touch

As you can see, if you are divorcing or considering doing so, working with a financial planner could be a shrewd strategy. We would be happy to discuss your situation and options in a non-judgmental, empathetic and positive way, so that you can look forward to a brighter future.

If this is something you would like to discuss, please contact us on info@janesmithfinancial.com or call 01234 713131.

Please note

This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different.

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. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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