Divorce can be a complicated and emotionally draining process, and dealing with financial matters, such as your Self-Invested Personal Pension (SIPP), can make it even more challenging.
We break down the basics of SIPPs and how they’re affected by divorce. We’ll discuss how they’re divided, your spouse’s entitlements, and ways to protect your pension.
What is a SIPP?
A Self-Invested Personal Pension (SIPP) is a type of personal pension that allows you to make your own investment decisions for your retirement savings.
SIPPs offer a wide range of investment options, such as shares, bonds, and funds, providing more control and flexibility compared to traditional pension schemes.
How do SIPPs work?
SIPPs work similarly to other personal pensions, with a few key differences.
Like a normal pension, contributions to a SIPP receive tax relief, meaning the government adds an amount equal to the basic rate of income tax (currently 20%) to your contributions.
Higher and additional rate taxpayers can claim further tax relief through their tax returns – up to 45%.
Any gains or income from dividends generated within your SIPP are tax-free, like with any other pension.
The key difference is investment flexibility.
The funds in your SIPP are invested according to your chosen investments, be it shares, funds, bonds, a mixture of all of these, or ready-made or managed portfolios: the possibilities are wide and varied.
Once you reach the minimum pension age (currently 55), you can start accessing your SIPP funds.
How are SIPPs split in a divorce?
When it comes to dividing SIPPs in a divorce, there are several methods:
Pension sharing involves transferring a percentage of one person’s SIPP to the other spouse.
The receiving spouse gains full control over their share of the SIPP, and it’s held in a separate account.
The value of the SIPP is offset against other assets.
For example, one spouse might keep their entire SIPP, while the other spouse receives the house or other marital assets or investments.
Pension Attachment (or Earmarking):
The court earmarks a portion of the pension for the other spouse. The pension holder receives the pension income but must pay a specified amount to their former spouse.
This method doesn’t provide the receiving spouse with a separate pension account. It’s also more common for Defined Benefit pensions and not Defined Contribution pensions like SIPPs.
Factors affecting how SIPPs are split
The division of SIPPs in a divorce depends on several factors, such as:
- Length of the marriage
- Each spouse’s age, health, and financial resources
- Contributions made by each spouse to the marriage, including childcare and homemaking
The court will consider these factors and aim for a fair distribution of assets.
Understanding pension rights in a divorce
Knowing your pension rights during a divorce is crucial to ensure a fair settlement. Here are some common questions and their answers:
Is my spouse entitled to half my pension if we divorce?
There’s no fixed rule stating that your spouse is entitled to half your pension.
The division of assets, including pensions, depends on the specific circumstances of your case and the court’s decision.
It’s certainly possible though that your spouse will be entitled to half of your SIPP.
Can a pension be protected from a divorce?
Protecting your pension entirely from a divorce is difficult, but there are steps you can take to minimise the impact:
- Consider a prenuptial agreement: This can help protect your assets, including your pension, in case of a divorce.
- Seek professional advice: Speak with a financial planner or family law solicitor to explore your options for protecting your pension.
However, attempting to hide assets or deceive the court can lead to severe consequences.
Do pensions always get split in divorce?
No, pensions don’t always get split in a divorce.
As mentioned earlier, there are various methods to divide assets, and pensions might be offset against other marital assets.
The decision depends on the specific circumstances and the court’s judgment.
Transferring and inheriting SIPPs
Understanding how SIPPs can be transferred and inherited is crucial during a divorce. Here are some key questions:
Can you transfer a SIPP to your spouse in divorce?
Yes, you can transfer a SIPP to your spouse, typically through pension sharing following a divorce.
When a share of a SIPP is transferred, the receiving spouse gains full control over their portion, and it’s held in a separate account.
Will my spouse inherit my SIPP?
In general, your spouse can inherit your SIPP, but it’s essential to specify your chosen beneficiary by completing a “nomination of beneficiaries” form or “expression of wish” form with your SIPP provider.
What about inheritance tax on that?
SIPPs, like other pensions, can be a tax-efficient way to pass on wealth.
If you die before age 75, your spouse can inherit your SIPP tax-free, whether they choose to take it as a lump sum or as income. If you die after age 75, your spouse will pay income tax at their marginal rate on the inherited SIPP income.
How to handle SIPPs during a divorce
Here are some tips to help you navigate the complexities of pensions and divorce:
1. Gather information about your SIPP
If you don’t have any, call your pension provider. Even if you can’t find your policy or plan number, they should be able to locate your details with your postcode, date of birth, and some other personal information.
2. Understand the different methods of pension division
Familiarize yourself with pension sharing, offsetting, and attachment to understand the options available for dividing your SIPP in a divorce.
3. Seek professional advice
Consult with financial planners and family law solicitors to ensure you’re making informed decisions about your pension and other assets.
4. Keep communication open with your ex-spouse
Maintaining open communication with your ex-spouse can help both of you reach a fair agreement and potentially avoid lengthy and costly court battles.
5. Review your beneficiaries
After a divorce, it’s a good idea to review and update the beneficiaries for your SIPP and other financial accounts.
6. Plan for the future
Divorce can have a significant impact on your financial situation. Take time to reassess your financial goals and make a new plan to ensure your future security.
Understanding pension valuations in divorce
In a divorce, it’s essential to accurately value the pension assets to ensure a fair distribution. Here are some key points to consider:
Cash Equivalent Transfer Value (CETV)
The Cash Equivalent Transfer Value (CETV) is the most commonly used method for valuing SIPPs in a divorce. It represents the lump sum value that a pension holder would receive if they transferred their pension to another pension scheme.
However, the CETV may not always reflect the true value of the pension, especially in cases involving defined benefit pensions or pensions with complex benefit features. In such cases, it may be necessary to seek expert advice for an accurate valuation.
In some cases, an actuary may be required to provide a more accurate valuation of the pension assets. Actuarial valuations consider factors such as the pension holder’s age, health, life expectancy, and the specific terms of the pension scheme. While actuarial valuations can be more precise, they can also be costly and time-consuming.
Another way to assess the value of a pension is to obtain pension forecasts, which project the future income that a pension is likely to provide. Pension forecasts can be helpful in understanding the long-term implications of pension division and can be used alongside other valuation methods to ensure a fair settlement.
Rebuilding your retirement savings after divorce
Divorce can have a significant impact on your retirement savings, and it’s crucial to take steps to rebuild your financial security. Here are some tips to help you get back on track:
- Reassess your retirement goals: After a divorce, you may need to adjust your retirement goals and expectations. Consider factors such as your new living expenses, life expectancy, and desired retirement lifestyle.
- Create a new savings plan: Develop a new savings plan that takes into account your revised retirement goals, income, and expenses. Make sure to prioritise your retirement savings and contribute as much as possible to your SIPP or other pension schemes.
- Review your investment strategy: Divorce can be an opportunity to reassess your investment strategy and make changes that better align with your revised retirement goals and risk tolerance.
- Monitor your progress: Regularly review your retirement savings and investments to ensure you stay on track to meet your goals. Make adjustments as needed to stay on course.
By understanding the impact of divorce on your SIPP and taking proactive steps to rebuild your retirement savings, you can work toward a financially secure future.
In conclusion, navigating the complexities of SIPPs and divorce can be challenging, but with the right information and professional guidance, you can ensure a fair division of assets and protect your financial future.
Can a SIPP be split more than once?
Yes, a SIPP can be split more than once, but the court must order each split. For example, if a person with a SIPP gets divorced multiple times, each ex-spouse may be entitled to a share of the pension.
How long does it take to transfer a SIPP to an ex-spouse?
The time it takes to transfer a SIPP to an ex-spouse depends on several factors, such as the complexity of the case and the efficiency of the SIPP provider.
In general, the transfer process can take anywhere from a few weeks to several months.