Amid the stress and emotions of a relationship breakdown, it’s vital to keep a clear head, and take often overlooked pension assets into consideration
January is a busy time for divorce lawyers. The stress of the Christmas holidays can bring things to a head in an unhappy marriage and this means a surge in divorce proceedings come the new year.
Those facing a relationship breakdown need to keep a clear head when it comes to their finances, as research shows pensions are being overlooked in the majority of divorce settlements –particularly by women. This is despite accrued pension assets often being worth much more than the family home.
There were 101,669 divorces in England and Wales in 2017 – a decrease of 4.9% on 2016.Source: Office for National Statistics (ONS)
Typically, it is the wife in a divorcing heterosexual couple who loses out when pension assets are disregarded during a split. She is less likely to have a private pension of her own, or will have a much smaller retirement fund than her ex-husband, for example, if she has taken time out of work to raise children or has worked part-time.
With divorce rates now on the rise among the over-60s, it is vital for separating couples to think about how they will fund their retirement and include pension assets when splitting the household coffers. Although divorce in later life is still rare and the numbers are much lower than for other age groups, the number of women aged over 60 who are divorcing is rising – it has increased by more than 20% in the past 10 years, according to the Office of National Statistics.
Divorce rates are highest among men aged 45-49 years and among women aged 40-44 years.Source: ONS
All pension assets – including any pensions already being paid and benefits that have built up – should be taken into account when fairly dividing finances on divorce. Pension funds can then be split, for example, or the value used to offset against other assets in a settlement. Yet a report by insurer and pensions firm Scottish Widows found that pensions are only discussed in about 30% of cases.
“Often with divorcing couples, and particularly younger couples or where children are involved, the woman will be more focused on short-term need, such as keeping the family home,” says Nichola Bright, senior solicitor in family law at Myerson in Altrincham. “But there can be huge hidden benefits within pension schemes. Many women are losing out by not demanding their right to a share of an ex-partner’s pension.”
There is a duty on both parties in a divorce to fully disclose their assets – including any pensions. The lawyers will need to have view of all the assets to ensure things are divided fairly. It is important to get accurate and independent valuations of any pension pots.
Divorce rates are at their lowest since 1973 (40% lower than their peak in 1993) at 8.4 divorces per 1,000 opposite-sex married couples.Source: ONS
Although this will have a cost – typically about £1,000 per person for a full actuarial report – it could be valuable. If a divorce goes to court, then there is a legal obligation to disclose all assets.
A court can order that an actuarial report takes place.
Ms Bright at Myerson says: “Get expert advice as early as possible to avoid problems or confusion down the line.”
Occupational or workplace pensions (both money purchase and final salary schemes), private pensions, self-invested personal pensions (Sipps), and the additional state pension, such as Serps, but not the basic state pension, can all be shared or divided. In some circumstances you may be able to claim a better state pension based on your ex-spouse’s national insurance contributions (if they are higher than your own, and if you do not remarry).
“Get expert advice as early as possible to avoid problems down the line”
There are a number of ways pension assets can be shared in divorce (see box, below). But since 2000 a pension fund can be shared between ex-spouses with a fund being transferred into an ex-partner’s name, so they hold a pension in their own right. Prior to this, pensions could not be split and it meant one side of the divorcing couple – usually the wife – would often be left with little or no pension provision.
As the options are complex it is advisable to seek expert legal and financial advice, particularly where there may be more than one pension involved, or if the fund is substantial.
How pensions can be split on divorce (scenarios assume the largest pension belongs to the husband)
Pension sharing – the wife obtains a share – by court order – of one or more of her ex-partner’s pensions. Usually the pension fund will give a transfer value and then the funds can be transferred into the ex-wife’s own name. This allows for a clean break and is often the preferred course. Many workplace pension schemes will charge a fee to split the fund and in some cases this fee has to be paid up front. In some cases, for example some large public sector pension schemes, the ex-wife must remain part of the pension scheme (albeit in her own right). With other occupational schemes the ex-wife may have to reinvest her fund elsewhere by setting up her own personal pension. If your ex has already retired and is receiving his pension but you have yet to reach pension age, you can defer the sharing order until you reach retirement age. In a similar way you can have a deferred sharing order on a lump sum payment, which may be attached to your ex’s pension. These deferred sharing options are not possible in Scotland.
Offsetting – any pension funds can be offset against other assets, usually property. So, for example, the wife may choose to keep the house and the husband keeps his whole pension. It is vital to have an accurate pension valuation to ensure the division is equal and fair. The wife should bear in mind the property is unlikely to provide her with an income. Offsetting does not require a court order.
Pension attachment or earmarking – the ex-wife gets a share of the pension (both the income and any lump sum payment) once the ex-husband starts to draw his pension benefits. As with pension sharing, this requires a court order. In reality, this option is not popular as the wife has no control over the assets (where they are invested and how and when they are taken), and she could lose some or all of the benefits if the ex-partner dies before retirement. The attachment order may also lapse if the ex-wife remarries.
Reinvesting pension assets
Once a pension sharing order is granted, if you are in receipt of the pension funds you will need to decide how to reinvest the money. In many cases, occupational schemes will ask you to transfer the funds out of the scheme. But if you don’t have your own pension arrangement, or even if you do have an existing plan, it makes sense to consider different options and where appropriate, take advice.
Alice Douglass, an independent financial adviser at Grosvenor Consultancy, based in Highworth, Wiltshire, says: “The existing pensions you have in place may not be the right home for this new pension money. You need to think about what risk you are willing to take with the cash and invest accordingly.
Review your will following divorce as your assets and wishes are likely to have changed
The average length of marriage at the time of divorce is 12 years for opposite-sex couples.Source: ONS
“Equally, leaving the funds in your ex-partner’s scheme may not be suitable as you may not have the same attitude to investment risk.”
Ms Douglass advises women going through a divorce to get a full state pension forecast and work out whether there are gaps that need plugging. This can also be taken into account during a divorce settlement, for example.
There were 338 divorces of same-sex couples in 2017, more than three times the number in 2016. Three-quarters of same-sex couples divorcing were female.Source: ONS
“Women need to think about their income after divorce and how it is going to be affected,” says Ms Douglass. “And they also need to keep an eye on retirement and how they want their lifestyle to look in the future. Divorce can seriously dent your finances and people need to plan and work out how they are going to rebuild.”
In those cases where a woman has had to share part of her pension with an ex-partner as part of a divorce settlement, she may want to focus on boosting her retirement pot by increasing pension contributions while she is working. The same is obviously true for men who have had pension benefits split following divorce.
Remember to review your will following a divorce as your assets and your wishes are likely to have changed.
‘The expert advice I had was invaluable’
Dawn Evans (pictured) feels lucky that she had excellent legal advice during her divorce last year. She received 51% of her ex-husband’s civil service final salary pension when the settlement completed in November 2017.
Dawn, 53, who lives in Timperley, Greater Manchester, has two teenage sons, and she says that initially her primary concern was keeping a roof over their heads. But her solicitor pointed out that her own pension provision was not large and that she was entitled to a share of her ex-partner’s scheme.
“I have 10 years built up in my own civil service pension from early in my career, but then I took time out of work when our boys were born,” says Dawn. “That was a joint decision we made as a couple and it meant we saved money on childcare for all those years.
“It was hard with all the emotions and stress of a marriage split to keep a clear head,” she adds. “But that’s why the expert advice I had was invaluable. My lawyer was able to explain to me all the details about pension splitting and that I could take my share of the pensions so I wouldn’t still be financially tied to my ex.
“The pension share will make a huge difference to my life once I can take it at the age of 60.”
Jo Thornhill is a freelance journalist who writes for a wide range of publications including the Daily Mail, This is Money and Travel Wire News.