Friday Highlight  

Five tips for negotiating a smooth financial separation

3. Look beyond the short term 

While divorces are expensive, funding them should never come at the expense of long-term financial stability.

While it may be tempting to dip into pensions or long-term savings pots to ease the cost burden, this can severely diminish retirement income and leave divorcees in a difficult financial position. 

For older couples, it is also worth remembering that wills do not become null and void in divorce. Both parties should therefore prepare new wills as soon as possible after separation, to ensure that assets go to the right person after death.

Finally, it is vital for both parties to consider their nominated recipient for their death-in-service benefit in case this changes post-divorce.  

4. Revisit clients' retirement plans

It is worth thinking about exactly how divorce will impact retirement plans. For example, will either party’s retirement date now need to change to accommodate alterations to income and personal circumstances? 

The effect of a divorce on pension plans must also be considered, as splitting pensions can become particularly complex as you get older – particularly if one party has already retired. 

Given this, as well as the different ways in which pensions can be shared under modern law – offsetting, splitting and earmarking – it’s worth seeking financial advice as to all the possible outcomes to ensure that both parties see a fair result.

5. Consider the impact on lifetime allowance calculations 

If the cumulative value of either party’s pension pots changes – as it is highly likely to in divorce – then its impact on lifetime allowance calculations must also be considered. 

For example, pension offsetting means each party can keep their pensions, so lifetime allowance is not affected.

However, if a pension has been split following a pension sharing order, both parties will have a new pension entitlement that will count towards their individual lifetime allowance limits. 

Different forms of pension sharing will impact lifetime allowance in different ways, so specialist advisers can again be invaluable in ensuring that divorcing couples are not taxed unnecessarily. 

While divorce is without doubt an extremely difficult time, understanding how to handle a smoother financial separation can help to make it a little easier.

Alun Williams is senior area manager at Wesleyan