How to help older couples who are splitting up

  • Describe some of the challenges of getting divorced in retirement
  • Identify the role of a financial adviser in the process
  • Describe the challenges with defined benefit pensions

 With older couples, marriages are usually very long, and it may therefore be more difficult for clients to establish exactly what was acquired pre-marriage. 

 Dividing the pension pot

 Pensions are clearly incredibly important for this age group. Where couples have already retired, pensions will be in payment. It is important to understand, however, that it is still possible to share a pension that is in payment.

 Where the pension is a defined benefit scheme, splitting the pension can be problematic. The capital values of defined benefit pensions rarely represent a fair reflection of the value of the pension benefits.

Unless the parties worked for the same organisation, or internal membership of the same scheme is available, the recipient of a pension sharing order from a defined benefit scheme will have to transfer the pension credit to a pension of their own. In most cases this will be a personal pension which is unlikely to provide the same benefits as the original scheme, so that there is an overall loss of benefits.

 Pension death benefits are lost on divorce, as the other spouse is no longer the widow or widower.  

 Flexible drawdown may also be relevant. Where there are liquidity issues it may be that funds can be drawn down from a pension, (although this would result in a tax bill), so to provide cash for the divorce to meet, for example, housing requirements.  

 Advisers can provide valuable advice regarding the parties’ options.   

 Looking beyond divorce

 Divorce can have a significant financial impact on older couples beyond the overall division of assets.

 As explained above, death benefits under a pension scheme are lost on divorce and splitting defined benefit pensions can result in an overall loss of benefits. 

 It is also important to consider spousal tax exemptions. If an individual leaves their estate to their spouse, they do not pay IHT. So for married couples, when the first of them dies they can leave their assets to the other without IHT and then those assets can then be passed onto the children/grandchildren with IHT only becoming payable on the second death. If there is a divorce, then IHT is payable on both occasions. 

 For these reasons, it is worth considering with clients whether a divorce is in practice the best way forward. What is it that they wish to achieve? Sometimes either formal judicial separation or a slightly less formal separation agreement, rather than divorce, achieves a level of certainty for the couple and enables them to live financially independently of one another without triggering some of the less desirable effects of divorce.

 There may be no rush to remarry, as often cohabitation is seen as more appealing for recent divorcees in retirement than remarriage. It may be that an individual prefers to separate rather than divorce so as to specifically avoid pressure from a new partner to remarry.