Pensions and divorce – what you need to know

By December 16, 2020Divorce
Someone signing divorce papers - capital gains simplification for divorced couples

A ‘divorce boom’ has been predicted as a result of the coronavirus lockdown, and one of the most complicated – and most hotly disputed – areas in divorce proceedings involves pensions. But there are some other divorce pitfalls that good financial planning can help you to avoid.


According to Citizens Advice, life in lockdown during 2020 has placed an “enormous strain” on relationships. Since April it has noticed a sharp spike in website searches for guidance on divorce proceedings. And, on the first weekend of September, views of its divorce webpage shot up 25% compared to last year. In response to the increasing demand, a number of family solicitors are now advertising ‘fixed fee’ divorces that will help couples to end their marriage without spending an exorbitant amount on legal fees.


Most people understand the value of using a solicitor to work through the legal aspects of their divorce, but a professional financial planner can really prove their worth also if you have more complicated financial arrangements that could take time – and money – to resolve. Worryingly, however, research from Legal & General found just 3% of couples in the process of divorcing have sought financial advice, but they were four times as likely to take divorce advice from their friends. That could prove to be very costly in the long run.


Getting your financial affairs in order

Once a solicitor has been appointed and the divorce petition is drafting, one of the next key steps should involve both parties (the petitioner and the respondent) completing Form E, which is available to download on the website. Both parties are encouraged to volunteer their financial information, including all of their pension holdings, at an early stage, as it will help to move negotiations along and increases the likelihood of reaching an amicable agreement and avoiding having to go to court.


Of course, making a full list of everything you own, including where your pensions and other financial assets are kept and how much they are worth, can be a very time-consuming and daunting prospect. This is especially true if you were not heavily involved or familiar with managing the finances during your marriage. But failing to make full disclosure can have serious consequences during a divorce case, particularly if one party tries to conceal pension assets from negotiations. Engaging a financial planner early on can help you to avoid any oversights that could come back to bite you.


Non-disclosure can also sometimes happen by mistake, particularly in the area of pensions, so getting a financial planner involved at this point can make the whole process a lot easier. It means you can trust them to gather all of the information you need about your finances and assets, including contacting pension providers to find out how much your pensions are worth, leaving you with more time to focus on other things.


Making the most of your finances

Seeking financial advice early on in the divorce process can prove beneficial in other ways too. During the divorce process, your solicitor is focused on ensuring that the necessary legal steps are taken to end the marriage. It’s not their role or responsibility to ensure your finances are kept in order. A financial planner, on the other hand, will be able to recommend some important and valuable changes to your finances that could improve your financial situation after the divorce. If you leave it until the settlement stage, you may miss opportunities for a financial planner to recommend some important and valuable changes.


For example, if any assets are liable to capital gains tax (CGT), a financial planner might be able to help you organise an ‘inter spouse CGT exemption’ (assuming any transfer of assets is completed before the end of the tax year in which the separation occurred). And there are other areas where a financial planner might be able to give you valuable impartial advice about your situation, and can help you to avoid some of the most common financial mistakes that people end up living to regret after their divorce.


Mistake one – focusing on the home and neglecting other areas

One of the most difficult aspects of any divorce is figuring out what to do with the marital home. Many people become highly attached to the family home during a divorce, especially where children are involved. This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home, but at the expense of losing a proportion of their spouse’s pension.


You may want to consider whether keeping the family home is the most sensible decision. In most cases, the better course of action is to sell the marital home, buy something more affordable, and take a slice of the former partner’s pension. Of course, this may not always be the right choice for everyone, which is why seeking professional guidance on your own personal circumstances is essential.


Mistake two – accepting an equal pension split

While equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50/50 split of the capital, as this may give you a higher level of income in retirement. In light of this, working with a suitably qualified financial planner can help you understand how the different options available to you could affect your retirement planning.


Mistake three – failing to check pension valuations

As we mentioned earlier, it’s very important that both parties complete their Form E, and legally disclose all of their assets. Even so, this is one of the areas where financial planners frequently deliver the most value to clients. Money brings out the worst in people, and you might be surprised at the number of spouses who attempt to conceal the value of their pensions or their businesses during divorce proceedings. An experienced financial planner will be able to help you obtain all of the relevant documents needed to value these assets, and help to ensure you get the fairest deal in the final settlement.


Helping you to move forward

No one who gets married thinks it will end in divorce. And whether the decision to separate is taken by you or your spouse, it is one of the most difficult and emotionally draining experiences anyone can go through. Over the years, we have supported a large number of clients during their divorce and our experience tells us that seeking financial advice early on can help to put your mind at ease and help to bring some much-needed clarity and stability.


But one of the best parts of financial planning during divorce is that it gives you the chance to start thinking of life beyond your divorce. It means you can take charge of your own finances, and focus on the things that matter to you most. This is a key time for you to review your assets thoroughly, help to establish your own personal financial goals, particularly around retirement, and to work on a plan to help you achieve them.


If you would like further information on the above, please get in touch with one of our experienced financial planners here.


This content is for information purposes only. It does not constitute investment advice or financial advice.