Pensions and Divorce
When a marriage breaks down the first point on the agenda isn’t normally who will get custody of the pension.
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, earmarking and pension sharing.
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.
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.
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.