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With so much to account for when getting divorced and splitting up the assets, one thing to consider is what happens to your pension. Does one of you get to keep it? Do you split it between the two of you – and if so, how do you split it fairly? How does the pension tie into my house? What other options are there? This post will look at these queries and provide you with the answers.
In the divorce process, pensions are dealt with, in one of three ways; pension sharing, pension offsetting and pension earmarking.
If you were the sole owner of the pension or the main breadwinner, the court may decide to give your ex a share of your pension. The amount given (pension credit) will be stated on the pension sharing order (PSO) and is shown as a percentage of the transfer value of the pension. This money will be transferred into a separate pension for your ex.
It usually equates to approximately half of the main earner’s pension and part of the tax-free lump sum. This pension will also gain the advantages that your pension receives and these rights will not be stopped, even in the event of your death. A benefit of pension sharing is that your ex can immediately access this money, and not have to wait until you retire. The pension credit can be attached to both an existing or new pension scheme.
If the pension credit remains in an already existing scheme which has not been cashed in yet, it will carry on benefiting from any increases that the pension may incur. In cases where the pension has been cashed in, pension sharing can still be an option, but usually, solicitors will charge higher fees for the additional work involved in determining your ex’s credit. For commencement of the PSO, the decree absolute and a formal court order are required.
This is where both you and your ex retain your pension schemes but other assets such as the house are taken into account to offset their value. In other words, if one of you had a considerably larger pension, the other may receive a larger share of the house or even the whole house if it is of similar value to that larger pension.
If you receive the house (and so long as all ties to your ex are/were removed) you could sell it, potentially giving you more money than a share in your ex’s pension would have given you. However, you will not have the retirement safety a share in the pension can provide. Bear in mind that if your ex can prove that the house was not bought during the marriage or as part of your partnership, then this will not be the case. A prenuptial agreement is usually given as evidence for this.
Pension Earmarking (or Attachment)
The individual with the pension (or larger pension) will also give part of the associated retirement benefits to their ex when they themselves start to withdraw them. These benefits include state pension payments, social benefits, private pensions, life insurance benefits and any returns on investments. Due to their variety, these payments can be taken from your pension income or your pension commencement lump sum (PCLS).
It is important to consider, however, that if certain situations arise both you and your ex could experience issues. If your partner has the larger pension and then dies before reaching retirement, you may receive none of these potential funds. If your partner retires early or even stops contributing to their pension, you may receive less than you initially expected. Also, if you remarry then you may not be entitled to any of this pension either.
Take note of this, and carefully weigh up the pros and cons of this option. Before deciding whether you want a share in your ex’s pension or whether gaining other assets (i.e. the house) would be more beneficial, consider the following; How soon will you be receiving your share? How soon will your ex want to retire? What income will you get from your existing pension and will this be enough to cover your expected expenditure? How large are your savings? If your savings and pension share will cover your future costs, then pension sharing or earmarking may be suitable options.
However, if they won’t cover these costs and the value of your other assets (including the house) amount to more, then pension offsetting may be the best bet. You can use this pension calculator to determine your retirement income and this guide to learn how to accumulate more savings if needed. Whichever option you choose, the court will notify your pension provider and payments will be made in the new format. Though situations do vary, the above options provide choice in the division of your (or your ex’s) pension.
When it comes to the house, Pension Offsetting may be the best choice, especially if you want to keep it or sell it on for profit. As with anything regarding divorce, carefully assess your options and discuss them with your ex to ensure a mutual agreement is reached.