The value of investments and any income from them can fall and you may get back less than you invested.

Managing the financial impact of divorce

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Sometimes life doesn’t go according to plan. Divorce can be a testing time and negotiating a fair financial settlement can often add to the stress.

If you and your spouse can agree on what is a fair split, possibly with the help of mediation, Family Court proceedings may be avoided. However, sometimes there is no alternative and the court will need to decide on the fairest settlement.

If you find yourself in that situation it is helpful to know what is at stake. When negotiating a financial settlement, the Family Courts will take both non-business and business assets into account. In most relationships, the primary non-business assets will be the matrimonial home and pensions. Business interests might include property, vehicles, income or profits.

Splitting pensions

When it comes to pensions what can be divided depends on where in the UK you are divorcing. In England, Wales and Northern Ireland the total value of the pensions you have each built up is taken into account, excluding the basic State Pension.

In Scotland, only the value of the pensions you have both built up during your marriage or civil partnership is considered. Normally, anything built up before you married or after your ‘date of separation’ does not count. 1

There are two main ways of dealing with pensions at divorce that apply across the UK. Pension sharing is often the favoured way of dividing a retirement fund because it achieves a ‘clean break’. This involves couples splitting one or more pensions. The aim is to ensure that the future incomes of both spouses are equalised. A specialist wealth manager will be able to help you implement any pension sharing order after the splitting process is complete.

Balancing assets

The second option, pension offsetting, sees pension rights balanced against other assets, such as the home. Typically, if one spouse has a pension fund worth £500,000 and the couple jointly own a property worth £500,000, one may keep the property and the other keep the pension, though things are rarely that simple.

Your solicitor will need to look very closely at the pension funds of both spouses. They will have to determine the true future value of all pension assets – not simply today’s cash equivalent values. A pensions expert will provide a solicitor with the current valuation, ensuring details such as hidden guarantees and annuities are identified and properly valued.

If business interests are at stake it can make things more complicated. Where possible, courts will tend to leave the business owner with the business and compensate the other partner with a larger share of other assets or maintenance. 2

However, if your spouse is also your business partner or an employee of the business it can make the process a lot more difficult. If other people have a stake in the business it will be even more complicated.

Starting afresh

Whatever happens, your life is going to be very different once the divorce is complete. Consequently, you may want to take another look at your investments, ask for help implementing a pension sharing order or review other financial issues to make the most of your changed circumstances.  

Matt Sullivan, divisional director and national head of professional services at Brewin Dolphin, says: “Pensions on divorce is a very complex area and one where clients, their solicitors and wealth managers should closely collaborate. Our national team of family law wealth advisors can provide valuable advice on cases involving pensions, investments and budgeting.”

Please note that this document was prepared as a general guide only and does not constitute tax or legal advice.

While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

The opinions expressed are not necessarily the opinions of Brewin Dolphin Ltd.

[1] The Money Advice Service: Dividing pensions on divorce or dissolution.

[2] The Money Advice Service: Dividing business interests on divorce or dissolution.

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