How should my pension be treated during divorce?

pandaman888

I separated from my ex-partner about a year ago and it looks like we will be starting divorce proceedings soon.  At the start of the separation, we split our assets in half. 

In terms of pensions, the value of my pension was about £100k higher than hers.  At the time of separation, she took an additional £50k in cash as a way to offset the pension difference.  I in turn had to borrow an additional £50k from my mortgage to allow this to happen so I can retain the family home and pay her the share of the pension.

Only now after the separation, I realise that there is an alternative to pay her cash for the pension and it can be done under a pension sharing order so that the pension portion could have been transferred into her pension.  Had I known at the time, I would maybe not have settled with the cash option since I am paying 4.5% rate on the extra borrowing.

So my question is:
Is paying the £50k in cash treated appropriately in offsetting the difference under the pension?  i.e. do I need to take into account of any tax allowances that says settling with cash outside the pension should be a different value?

Given the choice, is it better that I should offset the pension by cash or should I look at the pension transfer route?

Pat38493

You would have to get a solicitor and financial adviser to comment.  I think I've seen other posts saying that quite often, doing what you have done ends up being the better option because the calculation and execution of pension sharing orders and similar pension splitting options can be very expensive to achieve so it will erode the value that both of you gets.

However, if you are actually doing a formal divorce now, it may depend also on how agressive your ex partner (or you ex partner's solicitor) wants to be because sometimes they will insisst on actuaries being hired to look into all the pensions and so on.

Further - if a proper actuary looks into it it may not be as simple as just taking half the value of the difference in pensions and giving that as cash because cash has a different value in today's real terms, than a future pension, and also depends on your age and so on.

If you can convince all sides to try to keep it fairly simple it will probably be a lot cheaper in solicitors fees and charges.

lisyloo

£50K in cash is not worth £50K in a pension.
One reason is different tax treatment but there are other considerations as well (pension cannot be taken until at least 55 and possibly older).

The exact equivalent will depend on the type of pensions and your ages etc.

Also bear in mind it isn't worth spending thousand at a solicitor to quibble over tiny amounts.
Rough estimate of court costs if £10K each (loser might have to pay both if they are considered unreasonable).
So do consider whether things are worth arguing about.

I would suggest getting personal recommendations and spending a free half hour with a solicitor to get their advice.

My other advice is do NOT "chat" to your solicitor. Be very succinct. Draw up all the figures before you go and get to the nub of it in the first 3 minutes.

We are free, a solicitor is £600 per hour, so chat to us to your hearts content but be very succinct with them.

You are strongly advices to get a proper financial settlement to avoid comeback in future. You could for example inherit or win the lottery.

Marcon

pandaman888 said:

I separated from my ex-partner about a year ago and it looks like we will be starting divorce proceedings soon.  At the start of the separation, we split our assets in half. 

In terms of pensions, the value of my pension was about £100k higher than hers.  At the time of separation, she took an additional £50k in cash as a way to offset the pension difference.  I in turn had to borrow an additional £50k from my mortgage to allow this to happen so I can retain the family home and pay her the share of the pension.

Only now after the separation, I realise that there is an alternative to pay her cash for the pension and it can be done under a pension sharing order so that the pension portion could have been transferred into her pension.  Had I known at the time, I would maybe not have settled with the cash option since I am paying 4.5% rate on the extra borrowing.

So my question is:
Is paying the £50k in cash treated appropriately in offsetting the difference under the pension?  i.e. do I need to take into account of any tax allowances that says settling with cash outside the pension should be a different value?

Given the choice, is it better that I should offset the pension by cash or should I look at the pension transfer route?

Where exactly are you - ie have you agreed the financial settlement between you (albeit no financial consent order has been made as you've not even started divorce proceedings yet) and is it 'in place' in practical terms? You've got the house (?mortage arrangements sorted?), paid her the £50K etc?

It may be a bit late to go back and unpick the cash you've given her, unless she's willing to hand back your £50K, so if you're still on speaking terms, asking her how she'd feel about it and explaining why might be your next step. Also check how early repayment of the extra £50K on your mortgage would be treated - any penalties? Pension values - hers and yours - could have moved considerably since you split, so it could be opening a can of worms.

Marcon

Pat38493 said:

You would have to get a solicitor and financial adviser to comment.  I think I've seen other posts saying that quite often, doing what you have done ends up being the better option because the calculation and execution of pension sharing orders and similar pension splitting options can be very expensive to achieve so it will erode the value that both of you gets.

However, if you are actually doing a formal divorce now, it may depend also on how agressive your ex partner (or you ex partner's solicitor) wants to be because sometimes they will insisst on actuaries being hired to look into all the pensions and so on.

Further - if a proper actuary looks into it it may not be as simple as just taking half the value of the difference in pensions and giving that as cash because cash has a different value in today's real terms, than a future pension, and also depends on your age and so on.

If you can convince all sides to try to keep it fairly simple it will probably be a lot cheaper in solicitors fees and charges.

Depends if there are defined benefit schemes involved. Much simpler (and no actuaries needed!) if the pensions are all defined contribution.

pandaman888

To follow up, we are currently in separated stage and haven't even spoken to solicitors but we are amicable and still talk regularly as we have two teenage kids that we are co-parenting.  But I think reconciliation will be quite difficult and sense she is probably ready to start the divorce works soon.  Both our pensions are workplace pensions plans and we both have another 20 odd years to go to retirement age.

When we separated, we essentially divided up our assets in half (savings, pensions, and property).  However as my pension was higher by £100k, she took an extra £50k in cash to offset.  We agree that we essentially owe each other nothing if we divorce from here.  However, since then I found out about pension sharing and it has questioned me whether the way the pensions was calculated was correct and if I should have paid out cash for this.

Marcon

pandaman888 said:

To follow up, we are currently in separated stage and haven't even spoken to solicitors but we are amicable and still talk regularly as we have two teenage kids that we are co-parenting.  But I think reconciliation will be quite difficult and sense she is probably ready to start the divorce works soon.  Both our pensions are workplace pensions plans and we both have another 20 odd years to go to retirement age.

When we separated, we essentially divided up our assets in half (savings, pensions, and property).  However as my pension was higher by £100k, she took an extra £50k in cash to offset.  We agree that we essentially owe each other nothing if we divorce from here.  However, since then I found out about pension sharing and it has questioned me whether the way the pensions was calculated was correct and if I should have paid out cash for this.

Divorcing parties can agree between themselves how they wish to treat pensions, as they can with their other assets, although nothing is 'absolutely final' until a financial consent order has been made. Note that you couldn't have informally agreed to pay her the £50K from your own pension; it takes a court order to do that. So if the pair of you agreed that the money would be paid over at the time you parted company, then yes, paying over cash was the only way to achieve this.

The salient point is that you have already paid the cash. It may be capable of being unpicked so that it can later be paid out of your pension assets once the financial consent order has been done, but you need to check what the consequences of trying to do so would be - see my post above.

Pat38493

Marcon said:

pandaman888 said:

To follow up, we are currently in separated stage and haven't even spoken to solicitors but we are amicable and still talk regularly as we have two teenage kids that we are co-parenting.  But I think reconciliation will be quite difficult and sense she is probably ready to start the divorce works soon.  Both our pensions are workplace pensions plans and we both have another 20 odd years to go to retirement age.

When we separated, we essentially divided up our assets in half (savings, pensions, and property).  However as my pension was higher by £100k, she took an extra £50k in cash to offset.  We agree that we essentially owe each other nothing if we divorce from here.  However, since then I found out about pension sharing and it has questioned me whether the way the pensions was calculated was correct and if I should have paid out cash for this.

Divorcing parties can agree between themselves how to treat pensions, as they can with their other assets, although nothing is 'absolutely final' until a financial consent order has been made.

You couldn't have informally agreed to pay her the £50K from your own pension; it takes a court order to do that. So if the pair of you agreed that the money would be paid over at the time you parted company, then yes, paying over cash was the only way to achieve this.

The salient point is that you have already paid the cash. It may be capable of being unpicked so that it can later be paid out of your pension assets once the financial consent order has been done, but you need to check what the consequences of trying to do so would be - see my post above.

The other important thing is that if you have both agreed that everything is final and got a financial consent order, you also need to make sure to get a clean break final order (I am not sure what the technical term these days, but it has to be made completely final as a separate step)  - this means that neither of you can come back later asking for more.

400ixl

If she took that £50k as cash to live on and then decided to salary sacrifice the equivalent into her workplace pension that could be worth considerably more with the tax and NI avoidance.

So £50k could be a big overpayment in the balance of things.

Bostonerimus1

OP you are lucky that things are amicable as divorce can be both psychologically and financially disastrous when there is a battle. I think you need to get some professionals involved to make any division of assets, parenting responsibilities, alimony etc official, so I’d start with mediation and get a separation agreement drafted that you can then make legal with a solicitor and you can go over your current division of assets and make any changes necessary. The difficult thing is taking that step to make things official as it feels like a failure, but staying in the limbo of separation stops you from moving forward with your life.

Hoenir

Without a legally binding financial consent order you'll leave yourself open to a potential further claim. The consent order irrevocably separates your finances. Get one drafted and signed off.