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Pensions and Divorce

When a marriage breaks down the first point on the agenda isn’t normally who will get custody of the pension.  The recent recession and record settlements for disgruntled ex-spouses have put divorce firmly back in the public consciousness.

It is a sad fact that women typically have less pension provision than men.  This can be attributed to lower career earnings and the cessation of benefit accrual during a career break when starting a family.  Invariably, many wives will look to their husband’s pension pot for financial security in old age.

As pension rights are never jointly owned it is more than likely that, for a couple married for some time, these assets will be the biggest singly-owned asset in the household.

There are three main ways to deal with pension assets on divorce.

Offsetting

Historically, the division of pension assets has been virtually impossible and therefore the non pension-owning spouse was recompensed through other means.  For example, the husband retains his pension benefits and the wife is granted absolute ownership of the family home.  This is a process known as offsetting.  This method has been favoured by couples as it achieves a clean break and is a simple solution.

Earmarking

In the mid-1990s legislation gave the courts power to set aside a portion of the pension owner’s pension rights.  The practise known as earmarking allows the ex-spouse to enjoy a portion of their spouse’s pension benefits at the point they are crystallised.

This is unfavourable in many ways not least because it does not provide a “clean break” for each party and gives the control and timing of benefit crystallisation to the original owner.  Giving your ex-spouse this much control over your future retirement income and capital has undeniable drawbacks.  For example, an ex-spouse could deliberately try and reduce or delay drawing benefits specifically to cause financial harm to their former partner.

Pension Sharing

The Government recognised that earmarking was not a workable solution for those divorcing and therefore introduced the concept of splitting a pension or pension sharing.  This means simply that the original owner of the pension rights suffers a capital loss of benefits and their former spouse enjoys a positive credit of benefits.  This debit-credit system could be in equal or unequal measures.

Divorce is a massive event from a financial planning standpoint.  A full review of each party’s existing financial plans is essential to ensure that the separation is as equitable as possible and reflects the terms of the settlement.