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Divorce and retirement: knowledge is power26th February 2018 Family Law
Divorce affects every area of a person's life. Most of my work revolves around the financial impact of divorce and ensuring the best possible financial settlement for my clients. It was therefore really interesting to see the results of research commissioned by Prudential which shows a significant if unsurprising gap in average incomes between those who have experienced marriage breakdown and those who have not.
Of 1,000 adults planning to retire in 2018, divorcees were expecting average annual income of £17,600, compared with £21,400 among those who had never been through a divorce a difference of 18%. It would be really interesting to delve into some of the numbers behind the average, for example to see whether the inequality is greater among those on lower or higher incomes on retirement.
There could be many reasons behind this difference, including the fact that families that have had to make two households out of one may have skimped on retirement saving in order to set up home. Whichever way you look at it, those going through a divorce need to engage with the issue of pensions at an early stage in the process to do all they can to provide security in retirement.
Every case is different and pension provision can be among the more complicated elements of a divorce settlement. That said, there are some things I would recommend anyone going through a divorce should consider doing.
Educate yourself. Do you know the full extent of your pension provision? Over the course of a working life, you can build up multiple pension pots. These can get lost in the mists of time and, due to various corporate mergers and rebranding in the financial services industry, your pension fund may have changed names several times.
So, cast your mind back over all the jobs you have ever had. Think about which employers enrolled you in a pension fund. Dig out any old paperwork to see what private pensions you may have signed up to, even if you are no longer contributing. Armed with this information, you can use this tool to find out who administers each of your pension funds now and make contact with them to get up to date statements and ensure they have your current address details.
Disclosure is an essential part of the process of reaching a financial settlement. You and your spouse will need to provide full and frank information about your financial position and pensions are an important part of this exercise.
As well as educating yourself as to your own financial position, think through your spouse's employment and financial history. When considering their disclosure, ask yourself whether there are any gaps in their pension information, workplace pensions they may have neglected to mention, or personal pensions that could have been forgotten. Your solicitor will help you formulate questions in case of queries or inconsistencies and advise you on what can be done to find out more.
Work out what you want from the process. There are many different ways of dealing with finances on divorce. Sometimes, it is the right outcome for pensions to be divided equally through one or more pension sharing orders. In other cases, the cost of implementing a pension sharing order in respect of a modest pension pot may not be worth incurring. Couples will sometimes agree to trade off assets such as cash or property instead of a share in a pension arrangement. Security in retirement is an important goal but there are competing considerations that have to be factored in.
Consider taking financial advice. Since 2015, the rules on pension drawdown have changed, providing many more options for those at or around retirement age, including those who are going through divorce. Not all pension arrangements offer the same range of options and you may need to transfer your pension to another scheme to get the flexibility you want.
However, any rearrangement of your pension provision can result in the loss of guarantees or other benefits that come with your existing fund and the income drawdown can have adverse tax consequences if it is not handled properly. At JMW we very frequently refer our clients to specialist financial advisers to help with this process to make sure all opportunities are taken to maximise what is available to you on retirement.
This latest research gives us a small insight into the profound financial impact of divorce upon families. Even if retirement is many years away for the couple concerned, it's never too early to take a serious look at pension provision and how best this issue can be managed within a divorce.