As with all major events throughout life, planning and getting the right advice at the right time is always key, especially when it comes to figuring out if you have enough money to retire on. This is no different in the event of divorce or dissolving a civil partnership.
Each party will likely have assets saved towards retirement and this event can have huge implications on just how much your retirement pot or nest egg will be worth.
The million dollar question often asked is: “Have I got enough to retire on?”.
This is of course an important thing to be thinking about following divorce, and I have considered the implications of this in regards to financial planning with a number of clients over the years. Whilst the courts and legal professionals will provide the advice and guidance on the process to follow in this situation, I am able to assist with the financial planning aspects that should be addressed.
When you divorce or dissolve your civil partnership, any workplace or private pensions that you or your partner have had should be taken into account when dividing the assets.
In Scotland, only the pension that was built up during marriage or the civil partnership is taken into account.
The pre-April 2016 basic State Pension could not be split at divorce or dissolution, but the Additional State Pension (SERPS and/or the State Second Pension) which employees could build up under the old system can be shared.
Benefits built up for the new State Pension which applies from 6 April 2016 can’t be shared, although any ‘protected payment’ carried forward from benefits you have built up under the old Additional State Pension can be shared.
The pension(s) might have been split (or shared) at the time of divorce or dissolution, part of the pension(s) might have been ring-fenced to be paid out for one partner at retirement, or its/their value could have been offset against the value of other assets, such as the family home.
In the majority of divorce cases, retirement accounts, along with a family home, will be the largest assets that will need to be divided.
Understanding the important information of how they are split up and the rules that apply in various circumstances will allow you to move forward with a higher degree of confidence and knowledge at a time when you need it most.
Reviewing your pensions before you retire.
If the pension(s) were shared when you got divorced or dissolved your civil partnership, check how much your pension(s) are worth now and work out how much you might be able to retire on.
If the pension was part of an ‘attachment order’ check the terms of the order to find out what you will receive and when.
If the pension(s) weren’t shared because you were awarded a larger share of the house or other assets instead, you should work out how much any pension savings you’ve built up separately are worth.
If you are unlikely to have enough money to retire on, work out whether you can save any more.
Depending on the financial goals of each spouse, the spouse who earned the retirement account can retain the rights to it, while the other spouse is given a larger share of the marital asset in question in exchange for giving up interest in the retirement account.
For expert advice on divorce, pensions and retirement, why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.
Divorce or dissolution after you retire
If you’re getting divorced or dissolving your civil partnership or you’re contemplating this after you’ve retired, any pensions that you and your ex-partner have will be treated slightly differently than if you separate before you retire.
Due to the changes in accessing your pension pot introduced in April 2015, it’s best to seek financial advice as this can be a very complex area to understand on your own.
If you’re considering getting divorced or dissolving your civil partnership, it’s a good idea to take advice from both a solicitor and a financial adviser to make sure the pension is valued and divided correctly.
You shouldn’t make any assumptions about what you’ll be entitled to. The Pension Advisory Group has produced a summary that goes into some technical detail on how pensions are treated in divorce. This can be discussed with a financial adviser and is available online.
Your State Pension and divorce or dissolution
In April 2016, the new State Pension came into effect which is based on your individual National Insurance record.
The new State Pension can’t be shared if your marriage or civil partnership ends.
However, some people might have already built up an amount higher than the new State Pension (£179.60 a week for the 2021-22 tax year) because of entitlement to the Additional State Pension, which applied to some employed people under the old system.
This is known as a ‘protected payment’ and a court could order that this payment is eligible for sharing.
You can complete a BR20 form to get a valuation of your State Pensions which will help the court make a decision and also help with our planning discussions.
We use a cash flow modelling system, to assist with calculating how much you will need to fund a comfortable retirement lifestyle.
There is also a Pension Calculator on the Money Advice Service website. Together with a financial adviser, you can:
- Work out your State Pension age and State Pension income amount.
- Choose your retirement age.
- Calculate the target income you'd like in retirement.
- Look at your pension pots, current contributions and any other sources of income.
- Forecast your likely retirement income.
- Identify any retirement shortfall and suggest ways to improve this.
Once the level of required income is established, it is important to consider the most efficient method to achieve this. Again, timing is everything and taking the correct amount from the right investment pot will ensure your funds are working the hardest for you and your income is being sourced in the most tax efficient order.
Written by Debbie Packer Dip CII, MCSI, Founding Financial Adviser, Integrity365.
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.