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28.11.2023
What to do about pensions, divorce and the planning problem!
No-one plans to get divorced but unfortunately, it happens to lots of couples.
With more couples divorcing, it's understandable that financial advisers will need to plan around it or help customers through the financially-sticky process. We also know that many people visit a financial adviser for the first time at key life events with divorce being a biggie.
As part of the divorce order one spouse is allocated a percentage of the other's pension. This process is far neater than the previous iterations of pension sharing on divorce, as it means that the relevant percentage of the pension is transferred once the divorce is finalised. No longer do couples have to remain financially intertwined for decades after divorce.
The alternative (and more commonly used) option is offsetting where the pension assets are offset against other assets for example the family home. This is problematic as it often leaves women asset rich but cash and pension poor and with little ability to build up their pension pot if they don't have high earnings or disposable income.
On average women have smaller pension pots, either because they have earned less, taken career breaks and stopped contributing, or worked part-time during their careers.
The average pension pot for a man is just shy of £49,000 and for women it's just over £32,000 (clearly for advised clients this will be higher). This means that on average women lose out more than men as a result of pensions not being considered in divorce. But often a couple will prioritise a man's pension for tax planning purposes. It can make sense to focus on building up pension assets in the name of the highest earner as you'll benefit from higher tax relief on the money.
Or you might be using a pension to keep an income below certain thresholds whether that's the personal allowance taper, the additional rate band or below £100,000 for tax-free childcare purposes. But in a case for hoping for the best but planning for the worse, it might be worth considering whether building up pension assets more equally may benefit the lower-earning client later in life.
Of course, the difficult thing with all this is that no one plans to get divorced. And most people don't think that it will ever be on the horizon. So trying to get clients to plan their finances for this scenario will involve some uncomfortable conversations and tricky wording.
But as we know that women live longer, have smaller pensions and are less likely to get their fair share of pension assets in divorce, could you be doing a disservice to your female clients by not at least considering it?
I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
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