PENSIONS AND DIVORCE

Overlooking pensions when dividing assets could result in financial hardship in retirement.

It is quite likely that the UK is going to experience a spike in divorces as a consequence of the pandemic and an incoming change in law to allow quicker splits.

Lockdown put a huge strain on many couples for a number of reasons with arguably too much time together, and more time to reflect on life and what’s really important.

The number of divorces finalised in the first three months of 2021 was 2% higher than for the same period in 2020 – which was itself a record year for marriage break-ups. There were 30,171 divorces finalised in England and Wales in the first quarter of the year [1].

At the same time the “no-fault” divorce is on its way – though later than first billed – paving the way for more streamlined and faster break-ups. It was due to become law this year but has now been put back to April 2022. On top of this, there is now an online process for applying for divorce, reducing the barriers – and time taken – to starting proceedings.

The danger is with a growing focus on speedy, DIY divorces, that more complex tasks involved with dividing assets will fall by the wayside.

Pensions are already largely overlooked, with many couples wrongly focusing on splitting the family home.

While a higher priority may be given to a more tangible asset such as the bricks and mortar around them, a pension pot could actually be far more valuable.

By skipping the seemingly daunting task of dividing pensions, you risk being in financial difficulty in later life. This is a worry for women in particular who are already at a disadvantage when it comes to pension provision. The gender pay gap and the fact women are traditionally the ones to take time out of their career and raise a family are just two of a number of factors that get in the way of women saving for retirement as much as men.

The message is clear to divorcing couples – factor in pensions from the very beginning.

When it comes to splitting pension pots, there are typically three options:

1. Pension sharing is the most common as it provides a clean break between parties. The Court will issue a pension sharing order (PSO) stating how much of the pension, the ex-spouse or partner is entitled to receive, and each party can decide what to do with their share independently.If you are already drawing a pension when you get divorced, this can be shared too – but tax–free cash cannot be taken by the spouse in receipt of the pension share.

2. There’s also the option to “offset”, where you balance the value of the pension against another asset. For example, your ex might keep all of their pension fund, and as a trade-off you get more of a share, or all of the family home.It is sometimes the only viable option, if, for example, the main carer of any children wants to remain in the family home and there are few or no other assets apart from the pension.

While this can be a reasonably straightforward option, tax matters mean that comparing the value of the family home and the pension pot is tricky. Income from a pension is taxable, while there is usually no tax liabilities when you sell the family home.

3. The third option is to seek a pension attachment order. Under this order a percentage of your pension that you get, each week or month, is paid to your ex, or a percentage of theirs is paid to you.

Getting pensions valued is an important task when dividing assets, but it’s not just about obtaining the cash transfer value. You need to factor in other benefits attached to workplace pensions, for example, which are not always easy to value in pounds and pence.

One thing is clear on this issue – advice is crucial to ensure the right decisions are made for all the family. A financial adviser who specialises in pensions on divorce can help on how best to share out retirement savings.

Getting the right advice can make a huge difference to your future when you want to stop work. It is likely to be time and money well spent.

Source: [1] https://www.gov.uk/government/statistics/family-court-statistics-quarterly-january-to-march-2021/family-court-statistics-quarterlyjanuary-to-march-2021 

INVESTING FOR GOOD – THE LOW DOWN

Investors are increasingly choosing to put their money into companies that seek to make the world a better place.  

Over half of advised UK adults surveyed now want to move into ESG investing, according to a new study by insurer Prudential^[1]

“ESG investing” is where the focus is on backing companies with strong credentials when it comes to environmental, social and governance (ESG) matters. 

There are businesses all over the world that are dedicated to the environment by developing cleaner energy, sustainable transport as well as reducing plastic waste. 

Under the “social” part of ESG, the focus is on a company’s treatment of staff and suppliers, and to what extent it upholds labour and human rights. 

Governance relates to issues include ensuring fair leadership of the business, matters of executive pay and its stance on shareholder rights. 

In 2020, the amount of money invested in funds which aim to be responsible in these areas trebled year on year from £3.2 billion in 2019 to £10 billion, according to The Investment Association^[2]

The Prudential study would suggest that these figures could grow substantially again this year, with 61% of respondents (who have a financial adviser to handle their investments) saying they care more about the environment and the planet than they did before the pandemic. 

While these numbers are encouraging, 36% admit they actually have no idea what their current investments – including pensions – are invested in.

While having a financial adviser means that investors don’t need to worry too much about understanding the finer intricacies of global stock markets, ESG is becoming a worthy talking point – perhaps the new dinner party topic.

At Tavistock our ACUMEN protection portfolio offers a one-size-fits all ESG policy which looks into seeking maximise risk adjusted returns, whilst prioritising investments that exhibit strong quantitatively verifiable ESG characteristics.

Of course, this is not all about our own moral compasses and desire to help improve our world.

Investing for good is also rewarding from a returns point of view.

The FTSE4Good index of ethical stocks has beaten the FTSE 100 index of leading UK stocks over one, three, five and ten years. Globally, the MSCI World SRI Index for socially responsible funds has beaten the MSCI World Index over three and five years[3].

When it comes to choosing your investments, rather than selecting the individual companies in which to invest, you can use funds that are dedicated to ESG investing.

There are broad funds that look to cover a wide range of issues, and more targeted funds that may look just to seek opportunities within one theme. For example, investing only in companies that are tackling climate change by contributing to the decarbonisation of the world economy.

Ready to explore ESG investing further?

Your adviser can talk you through the options for investing in ESG funds for your ISA or pension. There are plenty to choose from with more and more funds being launched each month.

Together you can find the investments that are seeking to improve areas you feel passionate about.

Source

[1] https://www.mandgplc.com/~/media/Files/M/MandG-Plc/documents/prudential/02-06-2021-Covid-increases-desire-for-sustainable-investing.pdf 

[2] The Investment Association: https://www.theia.org/media/press-releases/ps52bn-inflows-active-funds-december-second-highest-inflows-record

[3] https://www.fefundinfo.com/en-gb/news/esg-investors-setting-the-pace-for-change