All you need to know about Pensions And Divorce
Dividing assets between couples in a pensions and divorce situation can be done in various ways. By taking good pensions and divorce advice from a qualified financial adviser, couples can inform themselves about the various options, and decide which is right for them.
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Pensions and Divorce – Offsetting
The first method of dividing assets in a divorce and pensions situation is offsetting.
With the offsetting approach, all assets of the divorcing couple are taken into consideration to divide wealth, but the pension remains with the pensioned spouse. Offsetting means simply dividing the total assets so that each spouse has an equal share of the total asset value. For instance, a husband has a pension fund of £80,000 and his wife has no pension, and as a couple they have other assets of £220,000, including a house valued at £150,000. Assuming a clean break settlement on a 50/50 basis, each person receives assets to the value of £150,000, the husband keeping the £80,000 pension plus £70,000 cash, and the ex-wife receiving £150,000 consisting of the house.
This pensions and divorce arrangement provides a clean break, and may be acceptable to young couples with small pension entitlements. It may also suit couples where both have a pension, or who have a wide range of significant assets.
The disadvantage of this divorce and pensions solution is that, while the husband is left with no tangible assets and may need to start a mortgage again, the ex-wife can no longer rely on that pension income and may need to start funding again.
While this is the principle behind the offsetting approach, divorce and pensions situations can often involve more complex measures to divide assets such as bank accounts, life insurance policies, and investments. In this case, taking pensions income advice from a qualified financial adviser is essential.
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Pensions and Divorce – Earmarking
The second approach to dividing assets in a pensions and divorce situation is earmarking.
In pensions and divorce situations, earmarking is a way of agreeing to split a pension at a future time, when the pension holder draws the pension. It is based on the principle that, although the pension is in the name of one party, it has been built up for both parties, and both have a right to share in it.
An earmarking order is a divorce and pensions solution made in percentage terms, to take account of the unpredictable future growth of the value of the pension. For example, if a couple divorces aged 47, the wife is offered a financial settlement with an earmarking order on 25% of the tax free cash lump sum. When the husband retires with a £60,000 lump sum, she then receives £15,000 and he £45,000.
However, an earmarking order is an often unsatisfactory solution in a pensions and divorce situation, as it lapses if the wife chooses to remarry, and is voided if she dies before receiving the money. In addition, there is no ‘clean break’ and both spouses must remain in contact. Furthermore, the husband can make life difficult for his ex-spouse by deferring taking his pension, for example. Again, pensions and divorce advice from a qualifed expert will clarify the implications of earmarking in each individual pensions and divorce situation.
Pensions and Divorce – Pension Sharing
Since 2000, it has been possible to split pensions between a couple in pensions and divorce situations. This applies only to divorce proceedings that began after that date, and covers occupational, personal, stakeholder and State Second Pensions. It does not, however, apply to the Basic State Pension.
Pensions and Divorce – Basic State Pension and Substitution
Under current legislation covering state pensions and divorce, the facility of ‘substitution’ is designed to protect divorcees who have never worked due to being full-time homemakers.
A divorced woman, for example, who is a career homemaker may be eligible to claim the full Basic State Pension based on her former husband’s National Insurance contributions, while his Basic State Pension entitlements remain unaffected. Again, pensions and divorce advice from a qualified pensions expert can ensure that a homemaker in a divorce and pensions situation receives her full state pension entitlement under the law.
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