How might a divorce impact your savings and pension?
There are certain issues which must be taken into account during divorce proceedings. Child custody, the division of tangible assets and legal fees are a handful of the most common.
However, it is just as important to understand the potential impacts of a divorce on your savings and pension plan. Let us look at a handful of variables which must be considered.
The value of the pension plan
It is first important to obtain an accurate assessment of the current value of the pension plan in question; particularly if it is a defined benefit (DB) programme. This is critical, as its worth (and any money that may be split between two parties) is determined by your salary contributions and the amount of time that you have worked. According to current UK laws, a pension valuation will be required on the date of the separation.
One of the best ways to discover the value of your pension as well as how much you will receive upon retirement is to utilise a pension calculator. These calculators can be accessed for free and results will be obtained within a matter of seconds.
What are your options?
It is important to highlight a few choices that you have when evaluating what steps to take. These include:
- Offsetting a pension.
- Sharing the funds.
- Earmarking the pension.
Offsetting will allow you to keep the pension, but its value will be included within any asset balance sheets (as well as jointly shared property). The only issue is that should these assets thereafter be split, one party could be allotted a disproportionate amount of the total pension value.
As mentioned previously, you may also choose to simply transfer a predetermined amount of the total pension value into the plan of your partner. This is frequently the case during amicable divorce proceedings.
The third option is to earmark your pension. In this case, the existing funds will not immediately be affected. You instead agree to subsequently pay a portion (to “earmark”) of your retirement income so that it can be transferred to your spouse. The only potential problem here is that these funds will stop being paid upon the death of the individual in question.
What about savings and ISA accounts?
We also need to quickly mention the impact that a divorce may have upon your savings. As a cash ISA can only be held in a single name, there are few concerns in regard to another party gaining access. In the event that you are obliged to transfer funds from a savings account due to divorce terms, you may need to provide advanced notice to your bank in order to avoid fees as well as the lower interest rates that might otherwise occur.
Not only is it critical to employ a pension calculator in order to determine its exact value, but it is prudent to speak with a financial adviser in order to appreciate any other potential concerns that may need to be addressed. With a bit of fiscal preparation, any unfortunate surprises can be avoided.
