The impact of divorce on teachers' retirement plans

Introduction

Regional Manager, Glen Roberts, from Wesleyan Financial Services, discusses the potential impact of divorce or dissolution of a civil partnership on your pension.

There's much to think about and consider during a divorce or dissolution of a civil partnership. An important aspect of the process is how you and your ex-partner agree to settle your finances.

Divorce settlements are meant to divide assets fairly between both parties. However, many people don’t realise that pension assets are included in this, and it appears that there is often a degree of uncertainty surrounding pensions.

Understanding what could happen to your Teachers’ Pension and/or private pension during a divorce may not be the most comfortable topic, but it is an important consideration. Depending on the circumstances, a pension is generally considered a joint asset – this means that it is subject to division in divorce.

Despite the fact that pensions can be highly valuable assets, they are often overlooked during divorce and the focus is directed towards other things such as property, children and even pets remain at the forefront in terms of importance.

The division of assets

Typically, during divorce proceedings both parties establish what they have in terms of assets. If neither party can agree on the division of assets and mediation proves unsuccessful, their solicitors can ask a court to make a financial order to determine how the assets should be divided on their behalf.

As part of the application, both parties may be asked to complete a Financial Statement or ‘Form E’ as it is more commonly known. This form asks for detailed information regarding all assets, including all pension plans and schemes.

Each divorce is different, whilst some couples agree amicably on who will get what during a divorce, for others it may be more complicated. For example, one spouse may have stayed at home to raise the children. They may have been unable to build a pension to provide for their future, as they’ve been supporting the other spouse who has been earning and feel that it is grossly unfair.

This is often when the value of pensions is taken into account during a divorce and related financial settlements, and where a Pension Sharing Order (PSO) may be issued.

What is a PSO?

A PSO is a formal agreement to divide your pension assets at the time of divorce. The court then decides what percentage of the pension should be shared to your former spouse or civil partner.  A PSO can be issued to members of workplace pension schemes such as the Teachers’ Pension Scheme (TPS) or the NHS, as well as holders of private pensions.

What is earmarking?

A pension attachment or earmarking order mean that the pension still belongs to the scheme member, but the scheme is required to make some form of payment to the former spouse when the member's benefits become payable.

What could happen to your Teachers’ Pension?

Depending on your circumstances, if you decide to end your marriage or civil partnership, it may be necessary to request information on the value of your pension from the TPS. This will allow a court to decide whether or not your pension should be shared with your partner and by how much.

The TPS will be required to calculate a Cash Equivalent Transfer Value (CETV) – the capitalised value of your pension benefits under the scheme. This is essentially a calculation of what the pension would convert to as a pot of money when that member reaches normal retirement age. It would include your pension, any lump sum and dependant’s pension.

Depending on the outcome, the court may award a percentage of this CETV to your ex-spouse or ex-civil partner, providing them with pension benefits. The value would be determined by the amount awarded by the court. Should this happen, your benefits will be reduced, and your ex-spouse or ex-civil partner will become a pension credit member of the Scheme. However, it is worth noting that a pension credit member cannot transfer any additional funds into the Scheme, neither can they transfer their share out of the Scheme or add flexibilities to boost this type of pension.

How can specialist guidance help you during a divorce?

Buying a property, getting married or having children are often considered life events where teachers may wish to seek guidance from their Specialist Financial Advisers. Divorce is also a life event, and depending on the settlement agreement, it can have a massive financial impact on your future.

If a PSO is issued, this will undoubtedly impact your finances during retirement – this is something that can’t be changed. However, what can be changed is what you can do to make up the deficit.

The sooner the changes in circumstances are addressed, the better the potential outcome for replenishing the deficit and achieving your desired retirement. If you would like support or guidance on understanding your financial position, speak to a Specialist Financial Adviser from Wesleyan Financial Services for a financial review. Charges may apply.