Cash or pension

Deciding between taking a cash settlement or a share of a pension can be one of the more complex decisions to make during a divorce. Here are some considerations that might help you make an informed decision:

1. Financial Needs: Assess your short-term and long-term financial needs. Cash may be useful if you need funds to secure housing or cover immediate expenses. However, a pension share could be more beneficial for long-term financial security, especially in retirement.
2. Age and Retirement: Consider your age and how close you are to retirement. If retirement is imminent, the pension may hold more value to you. If you are younger and retirement is far off, you may have other priorities that make a cash settlement more appealing.
3. Health: Your health and life expectancy can also be factors. If you have health issues that may affect your lifespan, you might prioritise cash now over a future pension.
4. Pension Type: Understand the type of pension you are dealing with. Defined benefit pensions can be particularly valuable as they often provide a guaranteed income for life, which can be difficult to match with other investments.
5. Investment Risk: Cash settlements give you the flexibility to invest or spend as you see fit, but they also come with the risk that the funds could be depleted. Pensions are typically invested in a way that aims to provide for the long term, although defined contribution pensions can still carry investment risk.
6. Tax Implications: Consider the tax implications of your choice. Pensions are usually a tax-efficient way to save for retirement, and you only pay tax when you start drawing the pension. Cash settlements may be subject to capital gains tax if invested, and any income generated could be subject to income tax.
7. Inflation: Pensions often increase each year in line with inflation, which helps to maintain the purchasing power of your retirement income. Cash does not have this protection and may lose value over time due to inflation.
8. Other Assets: Look at your overall financial settlement. If you have other substantial assets, you might prefer to take a larger share of those and forgo some of the pension, or vice versa.