Q. I am in the process of getting divorced. My ex-wife has sought legal advice but I am self-representing. I am happy to divide the matrimonial assets in my wife’s favour, provided that we are responsible for making our own retirement provision (as we have approximately 20 years until retirement and therefore have sufficient time to provide for ourselves). However, my wife’s solicitor has suggested that my wife is entitled to a significant proportion of my pension savings. Is this correct?
A. First, I have too little information to provide you with definitive advice and this would be an inappropriate forum in which to do so in any event.
It is common to take account of parties’ pension benefits when negotiating a financial settlement as part of divorce proceedings. There are a number of options for dealing with such benefits, including pension sharing, attachment and offsetting.
If the parties agree to a pension sharing order, this results in an agreed percentage of the pension savings of one party being transferred to the other party. This can be effected either internally (i.e. within a defined benefit scheme, resulting in the transferee becoming a member of that scheme) or externally. Often, parties prefer to effect an external transfer so as to retain control of their retirement planning (although this is not always in the best interests of both parties).
Another, less common, option is to seek a pension attachment order, under which the court sets out the element of one party’s pension which should be paid to the other party. This option is not commonly utilised however, as it does not enable the “clean break” that many divorcing couples seek.
Finally, parties can agree to “offset” pension benefits against other matrimonial assets. For example, this may involve one party keeping all of their pension savings in return for the other party receiving an enhanced share of cash savings or equity from the sale of the matrimonial home. This is arguably the most common method of dealing with pension benefits upon divorce.
Whether or not your wife is “entitled” to any or all of your pension savings is a matter of negotiation. I recommend that you seek advice from a solicitor, who specialises in divorce and whom is a member of Resolution. They will be able to advise you of the options available to you for negotiating a financial settlement and will seek to protect your interests. In the event that your wife seeks to take account of your pension benefits in negotiating the financial settlement, I urge you to seek advice regarding the value of your pension savings and how these ought to be accounted for as part of any financial settlement.
Q. I am a member of my employer’s defined contribution pension scheme. I am approaching retirement and I had assumed that the insurance company would simply pay me the pension they have projected in annual statements. However, my boss has recommended that I consider all of my options. Can you offer any assistance, please?
A. Yes. You stated that you are a member of your employer’s defined contribution scheme. This does not produce a pension in retirement, but is instead a tax-efficient savings vehicle for the purpose of saving for your retirement. Once you reach retirement, you have a number of decisions to make regarding how you wish to use those retirement savings to provide an income in retirement.
The majority of people purchase an annuity – a contract with an insurance company under which the insurer commits to paying you an income in return for your pensions savings. However, there are other, less common, options including income drawdown, under which your retirement savings remain invested and you draw an income from those savings.
There are a number of factors that you ought to consider when deciding how to provide your retirement income. You ought to consider what, if any, level of risk you are able to take and whether you have access to alternative income or savings. You should consider also whether you want your retirement income to keep pace with inflation, do you wish to provide a pension for your spouse after your death and would you prefer to take a tax-free lump sum from your pension savings or use the whole amount to provide a regular income?
Furthermore, if you elect to purchase an annuity, there are additional factors that might improve your retirement income. You do not have to purchase an annuity from the insurer with whom you have saved for your retirement – shopping around can improve your retirement income by as much as 30%. Similarly, if you or your spouse suffer from certain medical conditions or have received hospital treatment of a serious illness, you may qualify for an enhanced/impaired life annuity under which the insurer pays you a greater income (as they do not expect to do so for as long as ordinarily they might).
I recommend therefore that you seek advice from a chartered financial planner, who specialises in retirement planning. The decisions you make now are likely to be amongst the most important financial decisions you are ever likely to make and can impact significantly upon your retirement income and, therefore, your future lifestyle.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
