Divorce and pensions: The four main issues
Dividing marital assets can seem complicated, especially when it comes to divorce and pensions.
One worry for many separating couples is the division of pensions. The valuing of pensions can be very complex, particularly in the case of Final Salary pension schemes.
Main issues with divorce and pensions
The main issues with divorce and pensions include:
Final Salary schemes
The true value of these pensions is complex and open to debate. The scheme will provide a Cash Equivalent Transfer Value (CETV) for solicitors to base any sharing of assets. However, the CETV is rarely a true reflection of what it would cost the other party to purchase the same benefits. Consequently, relying on CETV can lead to unequal pension benefits being provided.
Guaranteed Annuity Rates
Some older pensions may have guaranteed annuity rates of around 10%, which, given today’s low rates, could in essence double the true value of that plan. These guaranteed rates need to be taken into account when sharing pension benefits.
Tax free lump sums
Some older company pension plans can offer higher tax free cash amounts. This is often overlooked and can lead to people losing out if they share the wrong benefits.
If they are different ages, one party might be able to take their pension benefits immediately, whereas the other party, if under 55, could have to wait before drawing their benefits.
How can an IFA help?
Seeking financial advice from an Independent Financial Adviser (IFA) may help you considerably as you go through the stages of a divorce. An IFA can offer value in terms of both time and money. They can discuss your financial situation with you and they can also help you prepare materials and advise on the splitting of assets.
An IFA can help you avoid making expensive mistakes when sharing assets or investments with your ex-spouse. For example, I read recently that one unlucky person ticked the wrong box when making withdrawals from his investment bond and ended up with an unnecessary tax bill of around £300,000!
IFAs are essential in assessing the true values of both parties’ pension benefits and how best to share these benefits. Financial planning can seem complex during and after divorce, yet an IFA can help you with financial planning and offer advice on divorce and pensions.