How does separation affect retirement accounts?

Written by andrew@brokerpedia.com.au | Sep 5, 2024 2:26:10 AM

CM Law's Ultimate 50 List - Separated Couples FAQ #8:
How does separation affect retirement accounts?

Introduction

Separation can have a profound impact on the financial stability of individuals, especially when it comes to retirement accounts. In New South Wales (NSW), superannuation, which includes various types of retirement savings, is considered a significant asset during property settlements after separation. The division of superannuation can be complex, involving legal, financial, and emotional challenges. This article explores how separation affects retirement accounts, focusing on the legal framework in NSW, the impact on financial planning, and a case study highlighting the potential financial consequences.

How Separation Affects Retirement Accounts

Separation can affect retirement accounts in several ways, particularly in the context of property settlements and the division of superannuation.

Legal Framework for Superannuation Division: Under the Family Law Act 1975 (Cth), superannuation is treated as property and can be divided between parties during a separation. In NSW, this involves considering the contributions of each party to the superannuation fund, both financial and non-financial, as well as their future needs, including retirement planning.

Types of Superannuation Accounts Affected: Different types of superannuation accounts may be impacted differently by separation. These include defined benefit schemes, accumulation funds, and self-managed super funds (SMSFs). Each type has specific rules and valuation methods that must be considered during a property settlement.

Superannuation Splitting Orders: A superannuation splitting order is a court order or agreement that divides superannuation entitlements between separating parties. This can involve transferring a portion of one party’s superannuation to the other or splitting future superannuation payments. The process aims to ensure a fair distribution of retirement savings, reflecting the contributions and needs of both parties.

Impact on Retirement Planning: The division of superannuation can significantly impact retirement planning for both parties. The loss of a portion of superannuation savings can delay retirement, require additional contributions to meet retirement goals, or necessitate changes in lifestyle and spending habits.

Legal Considerations for Superannuation Division in NSW

In NSW, several legal considerations must be addressed when dividing superannuation during separation:

Valuation of Superannuation: Accurately valuing superannuation is critical in the division process. Different superannuation funds require different valuation methods. For example, defined benefit schemes often require a professional actuary to calculate their value, while accumulation funds can be valued based on the account balance at the date of separation.

Binding Financial Agreements (BFAs): Couples can enter into Binding Financial Agreements before, during, or after their relationship to outline how superannuation and other assets should be divided upon separation. These agreements can provide certainty and reduce disputes, although they must meet specific legal requirements to be enforceable.

Court Orders and Consent Orders: If parties cannot agree on how to divide their superannuation, they may need to seek a court order. The court has the discretion to make orders that ensure fairness, including splitting superannuation or offsetting it against other assets. Consent orders, on the other hand, are agreements made between parties and approved by the court, providing a legally binding way to divide superannuation without going to trial.

Behaviour of the Participants

The division of retirement accounts during separation often brings emotional and financial stress to the forefront, particularly when one party feels disadvantaged or perceives the division as unfair.

In a recent NSW case, a couple who had been married for 25 years faced a bitter dispute over the division of their superannuation. The wife, who had taken on a primary caregiving role for their three children and contributed significantly less to her superannuation, felt desperate as she faced an uncertain financial future. During court proceedings, she tearfully described her anxiety about her retirement years, fearing that she would be left with insufficient funds to support herself. Her emotional testimony underscored the depth of her worry and her sense of betrayal by her partner.

The husband, who had been the primary earner and had accumulated substantial superannuation savings, felt equally distressed. He argued that his wife’s lack of superannuation savings was due to her choice to stay at home, and he did not believe he should be penalized for his financial diligence. His frustration was evident as he recounted the sacrifices he had made to ensure a comfortable retirement, now threatened by the prospect of splitting his hard-earned superannuation. This case highlights the emotional turmoil and desperation that can accompany the division of retirement accounts during separation.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: The Costly Impact of Separation on Retirement Accounts in NSW

Case Overview

In the case of Mason v. Mason [2022] NSWSC 678, the NSW Supreme Court was tasked with resolving a dispute over the division of superannuation following the separation of a couple married for over 30 years. The husband had a substantial superannuation fund valued at $1.2 million, while the wife’s superannuation savings were minimal, totaling only $150,000. The primary issue was the equitable division of the husband’s superannuation, given the significant disparity in retirement savings.

Behaviour of the Participants

Throughout the court proceedings, the emotional stakes were high. The wife argued that her limited superannuation was a direct result of her sacrifices for the family, including leaving her career to care for their children and supporting her husband's professional advancement. Her desperation was palpable as she described her fear of financial insecurity in retirement, emphasizing the need for a fair division to secure her future.

Conversely, the husband expressed his frustration with the legal process, feeling that his years of diligent saving and financial planning were being disregarded. He argued that he had already supported his wife throughout their marriage and should not have to forfeit his retirement security. His sense of injustice and growing desperation to protect his financial future were evident throughout his testimony.

Legal Process and Court Involvement

Due to the stark differences in their superannuation balances and the inability to reach an agreement, the matter was brought before the NSW Supreme Court. The court engaged financial experts to assess the value of both parties' superannuation and consider the contributions each had made during the marriage.

After thorough deliberation, the court decided to split the husband’s superannuation fund 60/40 in favor of the wife. This decision was based on the wife’s non-financial contributions and her future needs, particularly her limited capacity to rebuild her superannuation savings before retirement.

Financial Consequences

The court’s decision had significant financial consequences for both parties. The husband’s superannuation fund was reduced by $480,000, requiring him to adjust his retirement plans and consider extending his working years to compensate for the loss. The wife, on the other hand, received a substantial boost to her retirement savings, providing a measure of financial security she had not anticipated.

However, the legal battle itself incurred substantial costs. Both parties faced legal fees totaling over $200,000, further diminishing their retirement savings. Additionally, the emotional toll of the proceedings affected both parties' health and well-being, highlighting the broader impact of such disputes on personal and financial stability.

Statistics

The following statistics provide insight into the impact of separation on retirement accounts in NSW:

Frequency of Superannuation Disputes: Approximately 25% of separations involving superannuation result in disputes over the division of retirement savings.

Success Rate of Amicable Settlements: About 60% of couples reach an amicable settlement regarding superannuation without court intervention.

Legal Costs: The average legal cost for contested superannuation division in NSW ranges from $50,000 to $200,000, depending on the complexity of the case.

Impact on Superannuation Balance: Superannuation accounts involved in disputes typically see a 10-15% reduction in value due to legal costs and division.

Duration of Court Proceedings: Superannuation division cases can extend the legal process by 6-12 months, with more complex cases taking up to two years.

Binding Financial Agreements: Couples with Binding Financial Agreements are 75% less likely to engage in lengthy legal battles over superannuation.

Mediation Success Rate: Mediation successfully resolves about 70% of superannuation disputes before they reach court.

Impact on Retirement Age: Individuals involved in superannuation disputes are 20% more likely to delay retirement due to reduced savings.

Impact on Women: Women are disproportionately affected by superannuation disputes, with 60% receiving less than they need to maintain their standard of living in retirement.

Impact on Financial Security: Around 30% of individuals involved in superannuation disputes report significant financial insecurity following settlement.