When you’re in the midst of divorce negotiations, it’s easy to get tunnel vision and focus only on the here and now. The post-divorce future can feel a long way away, but that doesn’t mean you shouldn’t be planning ahead.
Financial safeguarding for life after divorce means thinking beyond the immediate division of assets and the logistics of living arrangements. The repercussions of divorce can reach far beyond the present moment – affecting pensions, savings and retirement plans – but these ‘future-proofing’ issues may be overlooked by couples wishing for a quick break, potentially leaving one or both parties at risk of financial vulnerability later down the road.
Without this kind of future planning, retirement could end up being financially difficult for divorcees who have not considered the potential implications. When you are married, you have two incomes supporting one residence and one shared retirement plan; after divorce, the same amount has to support two households and two separate retirements, and your previous plans may suddenly not seem quite as realistic. Building up pensions and savings takes time, and when you’re starting over post-divorce, it may feel like it’s too late, which is why the division of these assets is so important.
A fair pension agreement is vital for separating couples – particularly if one party hasn’t build up their own personal pension or has reduced earning potential, as is is often seen when one parent puts their career on hold to stay home and care for children. Women in particular may find themselves shortchanged when it comes to pensions during divorce according to a recent report on retirement, revealing that over two thirds of divorcing couples do not include pensions in their settlement discussions despite one in four women having a smaller pension pot than men.
Pension assets should always be considered a major asset – for some couples, it could be worth more than family home and is often the single most important aspect of post-retirement income. To come to an agreement about the division of these assets, first you will need to have the pension valued from the date of separation, taking into account the amount that has accrued during the marriage. Once this amount has been added to the pot, you will then need to decide how to divide it up. Your solicitor will be able to help you to determine how best to handle pensions in relation to your unique circumstances, but there are generally three main options for dividing up these assets: offsetting, sharing, or earmarking.
Offsetting weighs up the value of a pension against other assets, so one party may retain their pension while the other takes a greater proportion of property profits or savings. This method offers a clean break but may leave one party with nothing but their pension, and must be carefully considered in terms of the costs of running a home or the value of depreciable assets.
Sharing means that the pension is divided up into two separate shares to make up part of a final settlement, usually in a lump sum. This is the most common choice for separating couples, and can be agreed via negotiation or taken to court for an impartial decision.
Earmarking involves an agreement for one party to pay a portion of their retirement income to the other party at a later date, either as a lump sum or as a regular income. This can be more complicated if the parties retire at different dates, if the pension holder dies or the recipient remarries before retirement comes into effect.
In all cases, the best place to start is by speaking to your solicitor and pension provider to discuss the value, tax implications, and benefits of your pension assets before you decide on the best course of action. But whatever you do, don’t leave pensions out of financial negotiations during divorce! Prioritise your retirement plans alongside the immediate requirements of post-divorce living costs and asset division, and consider your future financial needs as part of the settlement, not as an afterthought.
To speak with a solicitor about divorce, financial settlements, pension division, or anything else to do with separation, get in touch with our family law team at www.franceslindsay.co.uk.