I challenge anyone to find two more complex and dreary subjects such as Pensions and Divorce. But, an important subject nonetheless.
Pensions –an asset that tends to be forgotten during divorce and can sometimes be a real struggle to get to grips with. It really is a jedi skill to keep a clear head whilst going through a divorce and taking proper advice from both legal and financial advisers is imperative.
Contrary to popular belief, all pension plans must be considered, even if they are already being paid. This means that not only the current value of pension assets but also the income being paid to the member.
Pensions can then be split or the value used to offset against other settlement assets.
Pensions firm Scottish Widows reported that pensions are only discussed in about 30% of divorce cases.
Where does Cash Flow Modelling/Analysis come into this?
Cash Flow Modelling helps simplify the settlement process and will give the divorcee an understanding of much income a pension asset will provide in retirement. It also, and infinitely more important, provides clarity on the sustainability that this income will feed retirement for the rest of the individuals lifetime.
Pension assets should be regularly reviewed, to ensure that both the pre-retirement growth and the income sustainability forecast is on target. Both of these factors should be tailored to the individuals needs, aspirations and objectives.
Typically, individuals who have not built up enough credits for a full state pension, rely on this source of post-divorce income as this is often the largest source.
State Pension should not be forgotten during this process and it is too easily dismissed.
State pension forecasting, using the BR19 calculation via the Government Gateway, should be included in all retirement planning.
In cases where divorce occurs when a pension is already in payment, if a tax-free lump sum was previously taken, this will not be an option once the pension has been split. This will prevent access to further tax-free lump sums.
An option would be to choose to flexibly access new pension benefits, however, income tax issues will affect not only the amount received, but also the level of the remaining fund value.
It is also of vital importance that a Cash Equivalent Value is not left to expire or alter in extended divorce proceedings, as all income forecasts can be rendered inaccurate or, worse still, at the point the pension benefits are required.
Another important factor will be to check the effects on each individual’s Lifetime Allowance and possible HMRC protection that may have been previously put in place as a result of the divorce and pension order.
Income may not necessarily be generated solely from pensions, other sources include investment income from a portfolio of Individual Savings Accounts, Investment Bonds or shares.
They will still need to be factored into the overall situation and can be considered as part of overall post-divorce income requirements as a standalone analysis.
An Independent Financial Advisor can provide advice in areas in which a solicitor cannot, and vice-versa. The benefit of these two professionals working together for a common client outcome in this complex but crucial part of divorce proceedings cannot be underestimated.
