The ‘huge’ mistake warring couples are making with pensions | Money News

Couples could be giving away cash to their soon-to-be ex by overlooking pensions in divorce settlements, experts have told the Money blog.

The family home often dominates divorce negotiations, despite pensions being one of the most valuable assets on the table.

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Divorcees are at risk of coming out of a breakup worse off than their partners if they are unaware of the value of their pension pots or their partner’s, take bad financial advice or overlook important steps.

“We regularly see people making rushed decisions during settlements without fully understanding the long-term impact on their retirement,” says Sam Robinson, a principal financial adviser at Almond Financial.

“People naturally focus on the house, savings and immediate costs during a divorce.”

We asked Robinson and divorce lawyer Yael Selig, partner at Osbornes Law, for their top tips on navigating divorce finances.

Understand your pensions

“One of the biggest mistakes people make is agreeing a financial settlement before properly assessing all pension assets,” says Robinson.

Don’t assume your home is your biggest asset, he says: “Some workplace pensions built up over decades can easily exceed the value of the family home, particularly defined benefit schemes.”

Defined benefit pensions distribute monthly retirement income payments based on your salary and years of service and increase in line with inflation.

“Overlooking them during negotiations can create a huge financial imbalance later on,” Robinson says.

Selig agrees it is a “sad reality” that many of her clients have no idea about the value of their partner’s pension pot – or indeed their own.

The government provides free state pension forecasting. The value of private schemes can be obtained by filling out a letter of inquiry known as Form P on the court service website to the pension provider, she says.

“This is the first step towards working out what we call equalisation of pension pots, which in essence means making sure that you get what’s fair,” Selig says.

Pension sharing orders shouldn’t be automatic choice

Many divorcing couples misunderstand how pensions can legally be divided, says Robinson.

“There’s often confusion around pension sharing orders and what each person may actually be entitled to. Without specialist advice, people can agree to settlements they later regret.”

Pension sharing orders are one form of asset division where a court orders that a portion of one person’s pension is transferred into the other person’s pot.

“This can lead to some parties choosing to offset pensions against other assets,” says Selig.

Selig is referring to an agreement to trade off one asset for another, which is sometimes considered a more practical solution than selling every asset and dividing up the proceeds.

“This may sound like an attractive offer at the time, but you will hopefully have many years ahead of you, so it is always advisable to seek professional legal and financial advice to determine what the best option is for you long-term.”

You can commission a Pension Sharing Report to assess the fairest way to divide assets, says Selig.

“It ensures transparency, fairness and compliance with the current guidelines,” she says.

“More importantly, it provides a valuation of the pensions, outlines the various sharing options and analyses the impact on both parties’ retirement benefits.”

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Don’t forget your beneficiaries

Many people fail to remove former spouses from pension beneficiary nominations after separating, says Robinson.

A nominated beneficiary is the person you choose to receive your pension death benefits if you pass away.

“Failing to do this can create major complications later and potentially mean pension benefits go to someone you no longer intended,” Robinson says.

Contempt of court

“Hiding assets or any type of non-disclosure can be extremely serious,” says Selig.

“The court can hold a party in contempt of court for misleading the court, which can result in a fine or imprisonment.”

Courts frequently reopen divorce settlements months or even years down the line if presented with new evidence of assets being concealed, she says.

Avoid bad advice

Selig’s final piece of advice is, “Divorce law differs depending on the relevant jurisdiction, and, if you or your ex-partner have assets in another country, you may need advice from an expert in that jurisdiction on how to ensure a fair split.

“An example of this could be if you are divorcing overseas, but your ex has a pension in the UK.

“You may be entitled to a share of it, but only a court in England and Wales can make that happen.”