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Splitting the difference

With many marriages ending in divorce, effective financial planning is important as couples who were used to sharing living expenses have to manage their finances separately. This applies not just to immediate needs but also to retirement planning.

Astonishingly, although there is a legal requirement for pensions to be considered in a divorce settlement, a survey by Scottish Widows found that only 13 per cent of divorcees could remember considering their pension arrangements as part of their divorce settlement.

The factoring of pensions into a divorce settlement is rarely straightforward but the abolition of safeguarded rights from April 6 this year has at least simplified one element of the settlement. Before then, any contracted-out benefits such as protected rights automatically became safeguar- ded rights when transferred to an arrangement for the ex-spouse, meaning no pension benefits could be taken from them before age 60 and no tax-free pension commencement lump sum was available.

Safeguarded rights can now be lumped in with other pension pots and are subject to no special rules.

This change makes it much easier to explain to divorcing couples how pension assets will be dealt with if they choose to split it using a sharing order, and increases the attraction of sharing as it is now much less restrictive.

It also makes a wider range of products available to choose from, since many did not have the facility to hold safeguar- ded rights in separately identifiable pots.

Of course, sharing a pension is only one option available to divorcing couples.

Earmarking, where the pension remains with the sch- eme member but part of it is allocated to the ex-spouse, is unlikely to become commonplace, but offsetting a pension against a couple’s other assets remains the best option for many.

This may be an even more attractive solution in these difficult financial times.

For many couples, their most valuable assets are often the family home and one or more pensions. However, with property markets low, couples may be reluctant to sell their house at present and may even consider deferring the divorce until things pick up. But remaining together in the same house could become increasingly difficult. Some creative pension planning could help.

One solution could be a twist on the stereotypical view of offsetting, where one partner gets the house and the other keeps the pension.

The problem with this standard arrangement is often that the partner with the house has no retirement provision while the partner with the pension can struggle to meet short-term accommodation costs.

However, if the individual is over the age of 50 (55 from April 2010), it will be possible to designate some or all of the pension fund to provide retirement income.

This can then be used to meet rental payments, or perhaps the pension commencement lump sum could be used for a deposit on a new house and the income used to fund mortgage payments.

The partner with the house can sell it when the market picks up and use part of the proceeds for pension provision.

This kind of financial planning is made particularly straightforward by some of the newer retirement savings products now available.

A good example is the Scottish Widow Retirement Account but there are several others that work well.

These products allow easy movement between retirement planning and retirement income and allow the retirement planning pot to be replenished by new contributions even while the retirement income part is being used to help with the rent or mortgage in this example.

Divorcing couples may not realise how pension arrangements can help with their financial planning, and this is an area where a financial adviser can add great value.

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