Getting divorced? Don’t forget your pension
BACK in 2018 it became legal for couples to prepare and submit their own divorce paperwork. Great idea, you might think, if you’re one of the tens of thousands1 of people in the country getting divorced this year. That’ll save some money, especially if your divorce is straightforward. But does a “DIY” divorce come at a longer-term cost?
Pension sharing orders are down
Ministry of Justice figures recently show that the number of pension order sharing applications has fallen by a dramatic 35% since the so-called DIY divorce was introduced (despite a 1.6% increase in divorces between 2017 and 2020)2.
As women typically reach retirement with far less saved than men – thanks to gender pay differences and women taking career breaks – lawyers are concerned that women are likely to come off financially worse in a DIY divorce.
What is a pension sharing order?
A pension sharing order is a court order that’s used to separate two people’s pension assets. They can be issued for both a divorce and the dissolution of a civil partnership. There’s no legal requirement for a couple to surrender part of their pension in a divorce settlement, so a percentage must be agreed between the couple – or the courts will.
Why are pension sharing orders important in divorce?
Aside from any property you might possess, your pension is likely to be one of your largest assets. Whether you’re using a lawyer or filing for divorce yourself, you should make certain that your pension pots are part of any divorce settlement.
How does a pension sharing order work?
If you and your soon-to-be ex can agree on how your pensions should be split, you’ll only need a consent order from the court to split your pensions. If you can’t agree on how your pensions should be divided, then the courts will decide.
The courts will value both you and your partner’s pension assets. The valuation will include your workplace pension arrangements – both present and lapsed (the onus is on you to locate each one – even those from long ago). It will also include any personal pensions, such as a self-invested personal pension. Even some annuities can be subject to a pension sharing order – but certainly not all, so do your homework. The basic state pension is exempt from pension sharing. But anyone over a certain age who receives an additional state pension should take note – as this is not exempt from pension sharing.
Once the courts have all the information they need, they’ll review the conditions under the order and split the pension in a manner they deem fair.
Act in haste, repent at leisure
If you’re sure divorce is what you want, do your research before deciding whether you need a lawyer or you’re happy to DIY it. You only get one chance to get this right and there’s a lot to think about.
Besides your pension and your house (arguably your largest assets), don’t forget about any investments you hold – which may also be part of your divorce settlement. It’s possible to transfer assets between husband and wife without there being a capital gains tax liability, but this should be done in the appropriate tax year. Leave it too late and you’ll face a tax charge. You should also update your will.
Once your divorce settlement is in, it can be intimidating to know what to do with a large sum of money. You may like to talk to a financial adviser if you’re looking for a personal financial recommendation.