Sunday, January 5, 2020

How could a divorce affect your pension? Why you could be forced to share money with an ex

Knowing that a pension could be shared out in a divorce if an important part of financial planning – but many people do not realise this is a distinct possibility. Michael Vale, family lawyer at Ansons Solicitors, has explained the hidden pension problems for those divorcing in later life exclusively to Express.co.uk.

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Explaining why it is important to know the facts, he said: “The rates of marriage and divorce in the UK are at historical lows, but the number of divorcing middle-aged couples is growing.

“Divorce peaked in 1993 when just 13.6 percent of over 50’s marriages ended in divorce, but just 25 years later this had jumped to an astonishing 33.2 percent.

“A good pension fund is now one of the most valuable family assets and reaching the best financial settlement that satisfies both parties is crucial to a happy later life.”

Michael revealed the steps to take to prepare yourself for divorce or death in relation to your pension.

Prepare thoroughly but keep it to yourself

Prepare for your divorce with notes about the history of your marriage, including the key dates. List all your assets, both marital and non-marital, including pensions and provide as much supporting documentation.

You can make notes about your spouse’s situation, but do not remove and/or copy any documents that relate solely to them, as this is against the rules.

If children are involved, you must have a clear vision of future arrangements and understand that these should be agreed amicably with the other parent.

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Pension rules reflecting life

The pension rules have changed to reflect this divorce trend, leaving many silver divorcees in a stronger position financially.

Pension sharing orders are commonly made when the Court settles financial and property matters, especially with older spouses, but they are only possible for divorce i.e., dissolution of marriage.

Courts have the power to transfer money from a pension pot(s) to an ex spouse’s pension or indeed, to a newly created pension plan.

Alternatives like offsetting exist, where a pension share is given up in return for the transfer of another asset class, like a property, but you should seek expert advice.   

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Pension death benefits

Pensions on death now offer greater flexibility, with more potential beneficiaries; the rules allow nominees/successors to be appointed in addition to dependents.

It was traditional to always nominate spouses to benefit from your pension on death, but now it’s possible to nominate children, grandchildren or ‘family accident’ beneficiaries, like mistresses or children born of extra-marital relationships.

Spouses who pay into a pension should review old nominations and letters of wishes after divorce to understand the options available.

Pension death benefits can be as a lump sum or drawn down as a pension by the person nominated to receive it. The tax consequences vary with the chosen option and also how old the deceased was.

Sometimes the pension trustees can consult with the family after death and collectively decide which option to follow.

When someone under 75 dies, previously a 55 percent tax charge was levied when the death benefit was paid as a lump sum, but now it’s zero percent – a significant tax saving when a person dies young.

When someone over 75 dies, the tax charge on a lump sum is now 45 percent (previously 55 percent). Where a husband or wife receives a share of their spouse’s pension as part of the divorce settlement, they can now usually access those funds from age 55.

Take professional advice on the options available and review your pension provider’s scheme rules carefully; they may not have implemented the changes yet.

Mind the potential pitfalls

However painful, you need to avoid being acrimonious with your partner in the divorce proceedings, as this will typically increase the legal fees. You should engage in meaningful negotiations and always try to agree arrangements for the children, the basis for a divorce and a financial settlement.

Any financial settlement must be based on full and frank disclosure of finances and any other relevant considerations, otherwise any settlement could be set aside with adverse costs consequences.

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