Pensions

How to protect yourself from the financial consequences of divorce

Divorcees tend to be worse off in retirement than those who are married, but there are ways to protect yourself from some of the financial consequences of divorce.

Recent research by Prudential has found that married individuals who are retiring this year can expect their pension pots to generate an average annual income of £19,400. In contrast, those who have been through a divorce will have a lower annual retirement income at an average of £16,300.
 
When it comes to splitting assets, the family home is not the only thing of value to be up for grabs. Pension plans are often the first or second most-valuable asset couples have built up.
 
Moreover, private pensions are becoming increasingly more important in financial settlements, not least because of the increases to state pension age announced this week by the government – bringing forward by seven years the shift of the state pension age up to 68.

These changes, alongside research on divorcees’ financial vulnerability, place a spotlight on the legal issues surrounding pensions and divorce that people need to be aware of before they break up.

The fair distribution of pensions can be a particularly important issue for women, who have a retirement income on average 6,400 lower than men, according further research from Prudential.

The Money Advice Service outlines a number of ways to divide a pension on divorce. They include pension sharing, whereby a spouse receives a percentage share of the ex-partner’s pensions and this is transferred into their own pension; and pension offsetting, where the pension’s value is offset against other assets such as the family homes.

It may also be possible to receive a lump sum payment from the pension when the ex-partner retires, but this latter option is not possible once either partner has retired.

What precautions can individuals take to ensure the fair division of a pension on divorce?
 
Hannah Field, senior associate in the family team at legal firm Russell-Cooke, says: ‘It is possible to divide pensions to ensure both parties have an equal share of the pension capital value, and indeed the income that the pension will generate.
 
‘It is also possible to offset the value of pensions by taking more cash from a property or savings account. Previous studies have indicated that women don’t get credited with the true pension value on separation. Cash and pensions cannot be treated the same, so therefore careful consideration needs to be given to the overall asset pool.’


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