Divorce or separation typically means that you shift from living in a shared household to living alone, and may become newly eligible to claim state benefits if your income is low – see Chapter 2.
These life events can have a big impact on your financial situation. Pension savings and pensions built up by you and your partner are a major part of those finances, so it’s important to think about how they are affected and what you can do to make sure they give you the best support.
Divorce
On divorce or the dissolution of a civil partnership, the couple’s assets have to be split between them. Often, the two most valuable assets will be a prop-erty if the couple have bought their home, and any private pensions each has built up. Because women still traditionally take on most of the unpaid work of caring and looking after the home, it is common for the husband to have built up the bulk of the couple’s private pensions, with the original intention that they would share the income in retirement. There are three ways in which pension savings can be dealt with on divorce:
- Offsetting. This means one person might keep the pensions, but the other get a similarly valuable asset, such as the home.
- A pension attachment order (earmarking in Scotland). There is no immediate change to the pension arrangements, but it is agreed that, once the pension starts to be paid, part of it will be transferred to the former partner. Similarly, benefits might be due to be paid to you if your ex-partner dies.
- Sharing. Part of the pension savings are transferred to the former partner, so this part becomes their own savings and will provide their own pension in retirement.
You can agree to offsetting without involving a court, but a court order is needed for pension attachment, earmarking or pension sharing.
Offsetting and pension sharing are both commonly used and have the advantage of creating a clean break between the couple. Pension attachment orders (earmarking) are less popular. There is no clean break, and they have several other drawbacks. For example, the partner with the pension scheme might die, stop paying into the scheme or delay their retirement, all of which affect the amount of pension the other person may get. If you are due to receive part or all of any death benefits, you might not be aware if your ex-partner dies. If there is a possibility that they may have died but you have not been informed, you can check by contacting the General Register Office (Directory, p 31). The indexes to all birth, marriage and death entries in England and Wales are available from the National Archives website (Directory, p 32).
If either or both of the couple have already started to draw pensions, this income will be taken into account as part of the divorce settlement.
How to split pension savings is particularly complex, and a subject to raise with your solicitor if you are in the process of divorce proceedings. For a free and less formal discussion of your options, contact MoneyHelper (Directory, p 31).
The old state basic pension could not be shared, but for divorced people who reached State Pension age before 6 April 2016, they can use their ex-partner’s NICs record to increase their own State Pension as high as the full rate. A court can order that any state additional pension be shared.
Under the new State Pension, each person builds up their own pension and there are no arrangements for sharing either State Pension or NICs. However, for many years to come, people reaching State Pension age on or after 6 April 2016 will be covered by transitional rules because they spent time in both the old and new State Pension systems. Under these rules, you might have a ‘protected payment’ which is an amount over and above the full new pension rate (see How much is the new State Pension? earlier in this chapter). A court can order that this protected payment be shared with your ex-partner on divorce. Contact the Pension Service (Directory, p 32) for help understanding which rules may apply to you and how.
Separation
If you separate without getting divorced or going through any other formal proceeding, there is usually no change to your pensions. You may, however, want to check that in the event of death, any survivor pension from a ompany scheme could still be paid to your separated partner if that is what you want to happen.
You might consider getting a judicial separation (where a court formally recognizes your separation and can make orders about your finances). In that case, the court can make an order for a pensions attachment order or offsetting (but not pension sharing).
Lifetime Individual Savings Accounts (LISAs)
Individual Savings Accounts (ISAs) are a tax-efficient way to save or invest for all sorts of purposes and there’s information about them in Chapter 5. However, since April 2017, Lifetime ISAs (LISAs) became available specifi-cally designed as a way for younger people to save for retirement. A LISA can be taken out by anyone aged between 18 and 40. The maximum amount you can save is £4,000 a year, but the government adds a bonus of 25 per cent to this (so a maximum government bonus of £1,000 a year). The money grows tax-free within the LISA and, from age 60 onwards, can be with-drawn tax-free and used for any purpose.
Savings in a LISA can also be drawn out early, and will be tax-free if used as a deposit to buy a home. Otherwise, on early withdrawal, the government bonus is taken back and there is also a 5 per cent penalty charge (though this was waived for a while during the pandemic). If you are a non-taxpayer or pay tax at no more than the basic rate (20 per cent in 2023/24), a LISA is a more tax-efficient way to save for retirement than a pension scheme. However, bear in mind that workplace pension schemes also benefit from money paid in by your employer. LISAs are offered by a range of providers, including some banks, building societies and investment firms. For a list of providers, see Which? (Directory, p 34) and search for ‘Lifetime ISAs’.