Divorce and pensions related issues can be complicated for parting couples. Divorce seems to be a topical issue these days, what with the pending Brexit divorce of the UK from Europe. Separating assets and agreeing payment of future commitments is difficult and can drag on for much longer than expected or hoped for. Some claim that the Brexit divorce payment is simply a gesture of good will from the UK, which is necessary in order to facilitate leaving. Others claim that it’s a contribution to previously agreed financial commitments made by the UK which the UK can’t legally withdraw from. Some hard-line leavers suggest raising the drawbridge and giving the EU the ‘Winston Churchill salute’ with regards the money! As simple as it sounds, this issue is far too complicated for such a course of action to provide a viable outcome.
As married couples undertake their journey through life together, talk of separation and divorce are far from anyone’s mind. The harsh truth though is that divorce has become a normal part of everyday life with 40%+ of marriages failing. Prevention is better than cure though, and as unsavoury a discussion as it might be, making preparations before the event will prevent problems in the future.
To provide a level of prevention rather than cure, prenuptial agreements are becoming more and more the norm, rather than the exception. However, different countries treat prenuptial agreements in different ways. It is important therefore to understand the laws relating to your particular circumstances before putting pen to paper. For example, in some countries it is possible to ring-fence certain assets in order to protect one partner from the bankruptcy of the other.
It should also be noted that prenuptial agreements need regular review. Asset values change; some assets can be based in countries that neither party live in. This is particularly true for expatriate and internationally mobile people. A couple may live and work in Spain, but have property and assets in the UK, or another European country, and perhaps offshore investments and savings. In certain cases, a divorce agreement in the country where the couple live may not be enforceable in another country.
Divorce and pensions – assets held offshore
Offshore financial territories can be a particular problem in such a situation. Most pension plans based in offshore centres will not respect divorce agreements made elsewhere. This means that in certain cases a local court order may be required in the territory where the assets are based. This can be both time consuming and expensive. It is therefore important to be completely clear about who owns what and the terms and conditions that would apply on divorce.
Divorce and pensions: the separation of assets
The most common way in which assets are divided is by ‘off-setting’. In simple terms this means that assets are separated to be subsequently owned in full by each party after the divorce. As such, one party might keep the house whilst the other keeps the share portfolio. Regular reviews are essential in such a situation, as no two asset classes grow (or otherwise) at the same rate.
Offshore pension plans can create issues whichever way they are separated. Some trustees won’t allow any form of ‘pension sharing’ which means the fund always has to remain in the specific owner’s name. Complex arrangements may then have to be made in order to share them and consideration given for the potential consequences of taxation. In some cases, however, transfers are allowed. As an example, a pension could be split 50/50 with the owner instructing the trustees to transfer the other partner’s share to an appropriate plan.
Divorce and pensions: the experience curve
We all learn by experience; people entering into second or subsequent marriages are often much better prepared for the possibility of another divorce. Divorcees tend to be more pragmatic, having gone through the process once already. Often, they decide to keep as many assets as possible out of joint names; some may be completely against marrying ever again! This can cause other problems, particularly in the event of one partner’s death.
Back to Brexit. Apart from the relatively easy process of when Greenland decided to leave the EU, this is a first. We are always being told that “lessons will be learned” by politicians when things go wrong. I would hope that all parties take note of the complexities associated with a country attempting to leave the EU. Who owns what? How are pensions separated? Who pays ‘maintenance’ and for how long? These and many other issues need clarifying well in advance. The clock is ticking!