Divorce is undoubtably one of the most difficult subjects to talk about when relationships come to an end. There are so many things to consider, with home and support naturally being the first area you should and would focus on. In fact, when you begin the process of separating a shared life the sheer number of things to deal with can seem overwhelming, and related to this is, the cost of divorce can have a lasting impact on your plans for later life.
Divorce is an emotional and stressful period for those who have to go through it, however it’s important that people think of valuable assets, such as pensions, when considering how they split their money.
Traditionally, the primary methods for dealing with pensions during divorce are:
Offsetting - where the pension assets can be offset against other assets of the divorcing parties
Pension sharing orders - where pension assets are divided at the time of divorce and there is a clean financial break
Pension attachment orders - also known as ‘pension earmarking’, where the pension provider of one party pays an agreed amount direct to the former spouse when the pension rights come into payment. This does not represent a clean financial break between the couple and risks the loss of future income for the former spouse if the person with the pension rights dies before retiring or the former spouse remarries
A change in the process
Before April 2018 spouses had to submit divorce paperwork to the courts. Since then spouses have been able to complete the divorce application process online. This means that instead of posting paperwork, those wanting to file for divorce can complete applications, upload the documents needed and pay fees online. Recent figures show that between October and December 2023, the online divorce service received 23,517 applications. Filing a petition for divorce has also become much easier following the introduction of the ‘no-fault’ divorce law in April 2022. As women typically reach retirement with far less saved than men, due to gender pay differences and women taking career breaks, there is a danger that they will come off worse financially in a “Do it Yourself” divorce.
You only get one chance to get it right!
Careful consideration and research are needed before deciding to “Do it Yourself”. If it is looking to be complicated, then divorcees need to make sure they are receiving professional legal and also financial advice before, during and after any divorce case to ensure any settlement is fair for all parties involved. Whilst keeping the family home may seem the most important thing at the time of the divorce, a spouse’s pension pot is likely to be one of the largest assets. It is very important that pensions are not ignored, as whilst they might not have an immediate impact, they will do so later on in someone’s life.
Why divorcees should think about retirement plans
By splitting your pension assets it could lower the potential income you may have in retirement. The Retirement Living Standards, based on independent research by Loughborough University, help to picture what kind of lifestyle you could have in retirement at three different levels – Minimum, Moderate and Comfortable – and what goods and services would cost for each level.
A single person will need about £14,400 a year to achieve the minimum living standard, £31,300 a year for moderate, and £43,100 a year for a comfortable lifestyle. For couples, it is £22,400, £43,100 and £59,000 respectively.
A ‘minimum’ lifestyle covers all your needs, with some left over for fun and social occasions. You could holiday in the UK, eat out about once a month and do some affordable leisure activities about twice a week.
A ‘moderate’ lifestyle provides more financial security and more flexibility. You could have one foreign holiday a year and eat out a few times a month. You’d have the opportunity to do more of the things you want to do.
A ‘comfortable’ lifestyle allows you to be more spontaneous with your money. You could have a subscription to a streaming service, regular beauty treatments and two foreign holidays a year.
It is also important to update any beneficiaries to pensions following divorce. This is an often overlooked but simple job to tell your pension providers who you would want to benefit from your pensions on death. If you have any questions regarding divorce or pensions in general please reach out for a free initial conversation.
At Armstrong Watson Financial Planning & Wealth Management, we work alongside you and your legal representatives to help build and support your retirement plans and regularly review these so you know if you will remain on track. Where appropriate, we can also use cashflow forecasting to allow you to better understand your plans and arrangements to help you make informed decisions.
Please get in touch if you would like to discuss your plans for retirement with a member of our financial planning team.
