A tough decision
We are all aware that as we reach pensionable age, we shouldn’t expect to rely on a state pension. In fact we are now positively encouraged to plan ahead, the Government are so concerned about this that they are introducing a new work based pension scheme which will apply to the majority of us from October 2012.
But what about those that this new scheme is too late to assist? Pensions are a tricky area in themselves but when it comes to sharing them between a separating couple it is imperative to get it right.
To put this in context, imagine a situation where Julia, 58 and Ken, 59, have been married for 35 years. They have raised two children who have now grown up and flown the nest.
Ken, who works in a local shipping firm, is looking forward to his retirement in a year or so. Julia has only ever worked part time as she and Ken decided she should dedicate herself to raising their children. Recently, Julia has given up work and now works unpaid, for a local charity shop.
Their home is mortgage free and worth £380,000. They live a comfortable life relying on Ken’s income alone. Julia is looking forward to spending more time with Ken when he retires.
Unfortunately, Ken has decided that the marriage is at an end and he would like to separate from Julia.
Aside from being heartbroken, Julia is left facing an unknown financial future. She has no income and although the mortgage on the house has been paid off she would still have the bills to pay if she stayed there.
Julia doesn’t want to sell up, she loves her house and wants to stay there. Ken doesn’t want to force Julia out of the house, he feels bad enough as it is so what can they do?
There are several options available to them, Julia could keep the house and offset the equity against Ken’s pension. The difficulty is that Julia has no income to be able to pay all of the bills on their large 4 bedroom home.
Ken is likely to need a capital sum to enable him to buy a small home. The other option would be to sell the house enabling them both to buy somewhere else and to share Ken’s pension between them, via a ‘Pension Sharing Order’. This would enable a share of Ken’s pension to be placed in a pension fund for Julia (either with the same company or another if she so chooses) to produce an income for her when she reaches pensionable age. In the interim, whilst Ken is still working he could pay Julia an amount each month to enable her to live. They could then lead independent lives from each other until retirement.
One final but relatively unused option nowadays would be a ‘Pension Attachment Order’. This wouldn’t be right for Julia as she may re-marry in the future and as a result would lose any benefit of the ‘earmarking’ on her re- marriage.
Of course, they should both take independent legal and financial advice to ensure they are aware of the implications of whatever decision they make.
This example, although simplified, touches on the complex nature of dealing with pensions and other assets on separation and divorce. If you wish to learn more about the contents of this article, please contact Demelza Butler firstname.lastname@example.org