April 2022 saw a landmark moment for divorce law in the UK with the introduction of the new “no-fault” process. Now, couples can end their marriages without having to go through the lengthy and often contentious process of assigning blame.
While no-fault divorces can be less emotionally charged than traditional divorces, they still present their own unique challenges – especially when it comes to pensions. In this blog post, read about how financial planners can help your clients to ensure that they’re protected during and after a divorce.
How no-fault divorces affect pensions
Failing to consider pensions during divorce can cause problems for couples who have been married for a long time and have accumulated significant pension benefits. In many cases, pensions are simply ignored during separation – even though they may be a couple’s biggest single asset.
Indeed, a 2021 survey by interactive investor found that almost half (49%) of divorced people admitted to not discussing pensions during their divorce proceedings.
There are two key reasons why many experts believe no-fault divorces could result in fewer pension shares.
Firstly, no-fault divorces can also be filed quickly without much notice. This can make it difficult for the other party to organise a solicitor and pursue the legal channels to come to an agreement about pensions ahead of the divorce concluding.
Former pensions minister, Sir Steve Webb, highlights another key concern, in that separating couples under the new “no-fault” process may be reluctant to raise issues surrounding the division of pension assets for fear of being seen as “obstructive” or “difficult”.
Sir Steve said: “It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions.
“While there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions.”
For these reasons, your clients are likely to find working with a planner highly beneficial – especially if they have significant pension assets.
The role of financial professionals in no-fault divorces
Given the complexities of no-fault divorces, couples need to work with a financial planner who can help them to navigate the process and protect their interests.
A financial planner can help by:
- Ascertaining which assets may be relevant to the division
- Assessing the value of each spouse’s pension benefits
- Helping to create a financial plan
- Guiding how to divide assets in a no-fault divorce
- Setting up a pension to accept any pension share that is agreed.
In addition, a financial planner may also be able to provide protection advice. Often, life insurance and other types of cover will be in joint names. One party taking on this cover, or policies being cancelled, could leave one or both parties underinsured.
3 common ways pension assets are split
There are three main ways that pensions are usually split.
Offsetting
With this method, a pension’s value is offset against a couple’s other assets. For example, if a couple owned a £400,000 house and a pension worth £400,000, one person may keep the house while the other person keeps the pension.
This way of splitting isn’t without its problems. Owning a property is likely to come with many running and maintenance costs, and the person who owns the house may need to sell it later in life to generate a retirement income. Pensions, conversely, generally come with very low fees and substantial tax benefits.
Earmarking
Sometimes referred to as a “pensions attachment order”, in this approach an agreement is made that the partner without the pension will claim a proportion of it in the future, whether that’s in a lump sum or as a regular income.
The downside to earmarking is that the person without the pension will have to wait until their ex-partner retires or dies before they can claim their part of the pension.
Pension sharing
This approach splits the pension benefits between the two parties, and a proportion of the pension savings are transferred to the person without a pension.
The advantage of pension sharing is that both spouses know the size of their pension shares when the agreement is drawn up – this provides a clean break.
Get in touch
If you have divorcing clients who would benefit from financial planning, or would like some guidance on pension sharing, please get in touch.
Email mail@delaunaywealth.com or call us on 0345 505 3500.
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