Pensions are often a tricky subject when it comes to divorce, but should never be overlooked – a pension can be the second most valued asset after property – particularly for couples over the age of 60, who may have built up a substantial retirement income. It’s important to declare any pensions and retirement savings when putting together a list of combined assets (and failure to do so could be considered non-disclosure), as a recent report by Scottish Widows has revealed that many women over 60 are failing to take into account their partner’s pension when it comes to negotiating a settlement. Almost half of those surveyed (48%) did not know they were eligible to benefit from their partner’s pension, and a quarter of women had no pension of their own.
Dismissing pensions from the asset pot could lead to a significant inequality when it comes to post-retirement income, and it’s important to understand how and why pensions should be divided during divorce. In most cases, pensions should be included in financial settlements, particularly in circumstances when one party has been unable to accrue their own pension – for example due to staying home to raise children.
The way you split pension benefits is up to you, but there are generally three options for dividing pension assets after divorce:
Pension Sharing: This is the most common choice, in which the pension is divided into two individual shares and make up part of a final settlement as a lump sum. The proportions of each share should be agreed upon by both parties, or, if they cannot agree, the decision can be taken to the family courts.
Pension Offsetting: By offsetting a pension, its value is weighed against another asset of equal value – quite often property – so that each party receives a fair amount of the overall pot. However, it’s important to consider the long term benefits of a pension against the costs of running a home or other depreciable asset in order to make sure the balance is fair.
Pension Earmarking: Earmarking a pension means that a portion of its value is assigned to one party when the pension comes into payment at a later date. However, this might not work for couples who want to make a clean break with a lump sum, or those who are likely to retire at different ages. Pension earmarking can also be an issue if the pension-holder dies before they reach retirement or stops contributing to their pension.
In all cases, pension assets should not be underestimated. The value of a pension may well be worth as much as property, and the security of a retirement income may outweigh a short term lump sum. Each situation is unique, and it’s worth getting professional legal advice before you make a decision.
When it comes to calculating assets and negotiating a financial settlement, make sure that any pensions are included in the pot, and you choose the most appropriate method of division for your circumstances. The guidance of an experienced solicitor is invaluable here, as they will be able to advise on the long term benefits and how to balance a pension’s value against the rest of your assets.
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