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Pensions: What you need to know when you divorce…….

Divorce or a relationship break-up carries many stresses and strains and you may have a million and one things to think about at present; dealing with your retirement plans is probably way down on your list of priorities. However, by organising the future, it may help bring closure to your past life, enabling you to move on to a better and brighter future.

Many people think immediately about the value of the home when sorting out their money in the event of a divorce; however the value of some pension plans built up over a long marriage can be significant and may outweigh the value of the marital home and MUST be one of the things included when sorting out any financial settlement. Although at such an emotional time it is often hard to look into the future, however, it is VITAL you try to minimise the impact of divorce on your retirement planning and ensure that BOTH of the divorcing parties are treated fairly.

At times of divorce both parties go through many changes in their personal situation and finances, thus when seeking out legal representation regarding your divorce, Independent Financial Advice should be considered at the same time (wherever possible) to ensure your assets, pensions and savings continue to be invested in the most appropriate manner.

Following fairly recent changes to legislation, when solicitors are looking at pensions that have built up over the lifetime of the marriage, there are three ways that a pension can be included as part of the divorce settlement, Offsetting, Earmarking and Sharing, each have their own pros and cons for the individuals concerned and these are broadly as follows:

Offsetting - where one partner keeps the pension fund value and the other gets assets in return of equal value, such as the marital home. On the positive side this is often the simplest method and offers both parties a clean break, however offset assets are valued at a specific point in time and are not geared towards retirement planning.

Earmarking - where a claim can be attached to either party's pension when the benefits are drawn. When the benefits are eventually paid out, the other party will become entitled to a share of the income and/or Tax Free Cash payment at that time. The pension company holding the fund keeps a record on file, recording the non-members share. The drawback on this type of order is that the non-member has little control over when the benefits are taken as control remains with the scheme member. A further drawback to this is if your ex-spouse were to die prior to retirement or if you were to re-marry (subject to holding company rules).

Pension Sharing – since September 2000, pension sharing has been an option open to divorcing couples. This option allows the courts to order an immediate splitting or sharing of pension funds. This results in the pension 'pot' being divided between each party on a percentage basis (often 50/50 where other assets are not an issue). The fund can either remain within the existing scheme (if allowable?) or be transferred into a completely new plan in your own name. This type of order enables both parties to have complete control over their own finances going forward and provides a clean break situation.

There are many websites which go into copious detail about how these options can be applied, however, here at Verity Wealth Management we believe in a personal service and think it is very important to discuss the options with our clients and their solicitors whilst listening to what you wish to achieve as part of your long term objectives.

Once your needs and requirements have been established we are then able to construct and implement an individual financial plan fully personalised for your own requirements.

At the same time, there is often a need to review existing Life Plans and to implement new ones following a divorce, to ensure that you are fully protected for any other of life’s events that may arise. Things to consider are:

Life Assurance – should there be young children and an ongoing Maintenance Order has been put in place by the court, it is advisable to try to put in place some form of Life Assurance on your ex-spouse which would cover future maintenance payments should they die prior to the end of the maintenance period. (This generally works best if you remain on good terms, if not an agreement between the two solicitors may be advisable). As life assurance plans are arranged on a Joint Life, 1st Death Basis, most plans will need to be re-assessed on divorce and generally new individual plans may be required.

Investments/Savings – many plans may also be dealt with as part of the Financial Settlement relating to the divorce. At such time any awarded to you as part of your settlement should be re-assessed as objectives and risk often change in these circumstances.

Independent Financial Advice is extremely important when couples are divorcing, here at Verity Wealth Management we are happy to work with you and your solicitor to ensure that you experience the best outcome possible for yourself.

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