The
number of people divorcing in retirement has risen in recent years, but this
group needs to be aware of a litany of financial pitfalls as they divide a
lifetime’s worth of assets.
Figures from the Office for National Statistics show that
between 2005 and 2015, the most recent full year for which data is available,
the number of women over the age of 65 getting divorced rose by almost 20pc,
from 4,654 to 5,554. The number of men of retirement age getting divorced
increased from 8,059 to 8,697, an 8pc rise, over the same period.
The ONS put the rise down to older people being “more connected,
economically and socially, than they were before”. Internet dating and people
continuing to work beyond the age of 65, and so being able to support
themselves, are thought to be the other reasons for the increase.
But those who divorce in retirement today will have more
entwined finances than those who divorce at a younger age – partly because they
have spent more time together, but also because of generational differences
that typically saw more non-working women in households previously.
Large pension pots, state pension entitlements, splitting large
properties and inheritance tax bills are just some of the pitfalls to look out
for, on top of the usual financial wrangling of divorce.
Split the pension pot?
“Generally, older people will have more money in their pension
pots,” said Mary Waring of Wealth for Women, a financial advice firm that
specialises in divorce cases. She said the issue was complicated by the fact
that many couples reaching the age of 65 today will consist of a husband who
worked, and probably has a valuable final salary pension, and a wife who did
not work.
Pension assets can be split in three ways: the whole fund can be
handed to one person, with the other spouse getting something of equivalent
value from among the couple’s other assets; it can be “earmarked”, meaning that
when money starts to be taken from the pension it is split between the spouses;
or the pot can be split, known as “pension sharing”.
Jon Greer, head of retirement policy at Old Mutual Wealth, said
there were disadvantages with “earmarking” that had made it less popular in
recent years.
“For example, the pension
scheme member gets to decide when to start drawing retirement benefits and the
ex-spouse has no control over when this occurs. If the member dies the
ex-spouse may receive nothing or receive less than they expected,” he said.
Ms Waring said it was often better to split the pension pot,
rather than one party getting the entire pension and another receiving cash
savings or the house.
“If the husband has a
large pot it may really be in his interest to do a pension share, as it may be
such a large pot that it will take him over the lifetime allowance,” she
said.
The “lifetime allowance” is £1m and any pension over this amount
will be subject to a tax charge. However, if a pension pot of £1.5m, say, is
split equally between the two spouses, the tax liability disappears.
Ms Waring said an overlooked area in these agreements was the
cost of sharing the pension and any financial advice needed to invest the
pension after it is transferred to the wife, which should always be included in
any settlement.
Final salary pensions normally continue to be paid to a
surviving spouse, but this benefit is lost on divorce. Anna Sofat of Addidi
Wealth, an advisory firm, said she had had clients who were separated but chose
not to divorce so that the wife received these benefits on the husband’s
death.
“Another issue is the
state pension, which is often not looked at in divorce,” said Ms Waring.
Individuals must have 35 years of National Insurance credits to be entitled to
the full state pension of around £8,000 a year. For every year they are below
this they lose one 35th of their entitlement.
“If the wife is a
non-earner, and stopped work at a reasonably early age, the chances are she
will not have 35 years of NI credits,” said Ms Waring.
“I say to all women to
get a pension forecast before divorce, and if they have not got the full state
pension but they have got to pay for some years of backlog, that will be paid
for of the divorce pot rather than her money, as the chances are it was a joint
decision for her to be a stay-at-home wife.”
However, Ms Waring said the major financial impact of divorcing
at this age was that both spouses had fewer years left in which to work in
order to make up any shortfall in their income.
“Even if both people are
working the chances of building up very much over the rest of their working
life will not be that high,” she said. “When there is less money in the pot,
getting divorced at a later stage is really tricky, as they do not have much
money to split.
“I suspect there are lots
of people staying married because there is just not enough money to divorce,
given the need to buy a property, let alone provide an income.”
One house becomes two
Another aspect of late divorces is that at the age of 65
mortgage borrowing is difficult, meaning that the proceeds of selling the main
home will need to fund the purchase of two separate homes, often
outright.
“You may be lucky and
have a nice London home that means you can buy two homes outside the capital,”
Ms Sofat said. “Or there may be no way you can do that. How are you going to
work out needing two homes and two incomes when pretty much all your life you have
planned for one?
“Even if you can get a
mortgage it will probably be on a shorter term with much higher repayments,”
she added.
Will I pay more IHT?
Divorced couples will receive the same inheritance tax-free
allowances as if they were married. They will get a £325,000 allowance, with
anything over this sum subject to 40pc tax. However, they lose the ability to
transfer assets between them tax free, which could subject more of the estate
to inheritance tax.
The new “residence nil-rate band”, which is currently £100,000
and will rise to £175,000 per person by 2020, protects housing wealth from
inheritance tax if the main home is left to a direct descendant.
Wealthy divorcing couples can actually benefit from the new
residence nil-rate band, as the tax-free allowance reduces for any estates
valued at more than £2m.
Couples with an estate worth more than £2m who divorce and split
their assets will be able to make full use of the allowance.
Rewrite your will
Rewriting your will is essential after any divorce, but is
particularly key for older divorcees, who have lower life expectancy, said
Rachael Griffin, a financial planner at Old Mutual Wealth.
In particular, divorcees need to look at any life insurance
policies they may have taken out years ago, and often forgotten about, and to
change any beneficiaries on “death in service” payouts or pensions.
“Look for life policies
that were taken out a number of years ago or pensions where you have nominated
your previous spouse as the beneficiary. It is not just the obvious stuff to
look at, but also revisit all historic information – you are going to be more
entwined than someone who has been married for five or 10 years,” she said.
Ultimately, Ms Sofat said older divorcees should be more
pragmatic in their approach: “They have lived a few years longer, so hopefully
can sit down and work out a sensible outcome without it costing an arm and a
leg by dragging it through the lawyers.”
