Pensions and divorce - preparing for a new start

It is a sad fact of modern life that one in three marriages now ends in divorce. Even divorce amongst older couples in on the rise, but in this case, the financial impact can actually be even greater than it is for perhaps younger, less established couples.

The main issue for women is pensions provision. Statistically, women are likely to have much smaller pension pots than men, for two main reasons – they on average earn less than men and they are also more likely to have spent time out of the workplace raising children. In the event of a divorce, therefore, it is as important to consider the fair split of pension provision as it is the division of any other assets. If one spouse has no pension savings because they have stayed off work to support either house or family, while the other has worked and built a substantial fund, this should be taken into account when determining the settlement.

In reality, of course, you may not actually split the pension fund itself but instead, offset your rights to it against the value of something else - perhaps some investments, business assets or even the marital home. Particularly where children are involved, for example, the marital home may be a more precious asset to ensure minimum upheaval in the short term. However, the benefits of this then just need to be weighted against something more formally related to retirement.

If a more formal arrangement over pension assets is required, there are a couple of options. The first might be to earmark a portion of your ex-spouse's pension fund, deferring receipt of that benefit until they retire. However, such earmarking leaves one partner dependent on the other, reducing the chance of a clean break. You may have to wait years before benefiting – and, if your ex-spouse dies before retirement, you could end up with no formal provision at all.

However, it is also now possible to split a pension at the time of divorce. A dependent ex-spouse is now entitled to a portion of the main breadwinner’s pension, allowing them to move their share away from the original pension fund. This is a much “cleaner” approach, enabling both parties to move on and also allowing them full control over their share. If the main pension holder dies or either remarries, all retirement rights remain protected.

If you ever find yourself in such a position, it is vital to take both legal and financial advice before making any decisions. Whatever your personal circumstances, it is worth talking to your financial adviser up front, to ensure that, whatever the future might bring, you are well prepared.

Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.