Divorce – the battle for the pension

Figures from the Ministry of Justice show that there has been a 43% year on year increase in the number of pensions being targeted during a divorce settlement - 11,503 in the year to March 2017, up from 8,027 in the previous year. Gary Smith, chartered financial planner at Tilney, takes a look at the reasons behind this.

“Over the past couple of years, we have seen the average age of a couple getting divorced rising, leading to the so called ‘silver divorces’. Historically, no matter what age a couple was when divorcing, the pensions pot either member had did not play a huge part in the financial settlement due to the fact that typically only 25% could be taken as a lump sum. However, when the pensions freedoms were first announced and it became possible for people to access a potentially large lump sum at the age of 55, some in the industry predicted that pensions would become a much bigger focus for solicitors. And it appears that has indeed been the case.

“If a couple divorces in their 30s, the chances are they will not have had the time to build up a significant pot and therefore the pension may well be dealt with by offsetting the value against other assets. In their 60s, however, the pot is likely to be at its greatest value, and solicitors are becoming increasingly more savvy in this respect. There has also been a lot of noise in the media recently about the large sums people have been offered to transfer out of their Defined Benefits scheme, and this has also put the pension pot on people’s radar.

“We have also noticed an increase in solicitors favouring splitting pensions as part of a settlement as the divorcee is guaranteed to get something rather than a maintenance payment that would cease on the death of the former spouse. Also, pensions don’t typically form part of your estate for IHT purposes.

“However, there are some circumstances where giving up part of your pension could actually benefit you. For example, reducing your pension could bring you below the lifetime allowance limits, and avoid potential tax charges of up to 55% being incurred in retirement. This could prove beneficial for those who have pension pots in excess of £1m. Although following divorce, where an individual sees a reduction in their pension pot, it might prove difficult to rebuild their pot due to the Annual Allowance being reduced to £40,000 or for those earning above £150,000, the Tapered Annual Allowance potentially restricting funding to only £10,000.

“As always, it is best to get dedicated financial advice to ensure you and your solicitor get the best outcome for all parties.”