Why your pension may be the most valuable asset you have to split - Sarah Coles

There are some things we all secretly know about being confined to close quarters with our partner, but nobody is allowed to admit – like the fact we’re sick to the back teeth of each other, and most of us are one bout of tuneless whistling or one wet-towel-on-the-bed away from a full-on meltdown.

'Your pension may well be the most valuable asset you have to split'.

Government figures show that around half of Brits are struggling emotionally at the moment: 29 per cent of people in this group say their relationships are under strain and 18 per cent say they’re spending too much time with others in their household.

Each year, on the first Monday after we emerge from the two-week Christmas break with our families, there’s a surge in divorce enquiries. After the first lockdown there was a very similar rise, and this Monday - if all the tense stand-offs you see in the supermarket are anything to go by - there may well be another one.

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And these aren’t flimsy short-term relationships that are crumbling under the first signs of pressure. The average length of a marriage before divorce is 12.3 years, while the average age to get divorced is 47.7 years for men and 45.3 years for women.

Splitting up is never easy, but the stakes can be much higher when you’re older, because not only do you have more to lose, you also have less time to start again. So if you’re facing a divorce later in life, it often makes sense to get some legal and financial advice before you do anything else.

For many people, the family home is the biggest bone of contention, but from a financial perspective your pension may well be the most valuable asset you have to split. It’s vital you understand your options. There are basically three.

The first is the one that’s most likely to spring to mind: pension offsetting. This is where one person keeps the pension, and trades it against other joint assets – like the family home. On the one hand, it can be an easy way to get a clean break and it can help if one of you is absolutely determined to keep the family home. However, you need to have enough assets to balance against the pension, you need to understand the value of what you’re giving up – which usually means some sort of valuation – and you need a plan to build up whatever you sacrifice.

The second option is pension sharing, which is where you split what’s currently in the pot. On the face of it, this is pretty off-putting, because it involves the expense of having a valuation and getting the court to issue a pension sharing order. You might also need financial advice if the pension needs to be transferred, and both of you need to plough money into your pension afterwards to make up the difference. However, in many ways this leaves you in the best possible situation, because you both have a pension, and you get a clean break.

Typically these are the two most popular options, but since the decline of legal aid and the growth of couples representing themselves in court, the number of attachment orders (pensions earmarking in Scotland) has grown too. This means that when the person holding the pension starts to draw it, they must pay a lump sum or income to their ex-partner. It feels easier, because you both get a share of the pension, and the up-front cost can be lower. However, there are some major drawbacks.

It’s not a clean break, because maintenance needs to be paid from the pension. The person taking the pension also pays all the tax, regardless of who ends up with the money. Meanwhile, the person receiving a share has no control. They can’t choose when they receive the benefits – so their ex can delay taking the pension. They can also stop paying into that pension and build up savings elsewhere. Then when they die, the pension payments will stop to their ex. It means it’s not something to be entered into on the assumption it’s an easy solution.

Unfortunately, there’s nothing straightforward about divorce. In most cases, it’ll involve months of stress, and when it comes on the back of a year as horrific as 2020, it’s going to require every last ounce of stamina. However, don’t give up. When this is all over, you can make a fresh start with someone you actively want to spend time with – even if they whistle tunelessly and leave wet towels on the bed.

Sarah Coles is a personal finance analyst at Hargreaves Lansdown

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