It is particularly concerning that divorced women are often retiring with pension funds a quarter of the size of divorcing men.
According to new research by the Pension Policy Institute this is a very real disparity and one which is caused by individuals not thinking enough about their ex-partner’s pension pots as negotiable assets in the divorce.
They often are unaware that pension pots are the single largest asset after the family home for divorcing couples, but confusion over how to split a pension during a divorce, and even how much is available, can often lead individuals to neglect these valuable assets.
Why there is disparity
Far too long the division of pensions has been confused by jargon, complicated structures and changes to the tax treatment and legal rules.
This oversight is also evident in recent guidance from the Pension Advisory Group, which highlights the need for judges to ensure settlements in divorce proceedings concerning pensions are fair. It urges them “to make outcomes more predictable and consistent for divorcing couples, their advisers, and the judges across England and Wales who deal with these issues daily.”
This positive step came after research was published revealing 80% of almost 400 cases studied involved individuals with pensions which could have been relevant when dividing assets.
The fact that only 14% of these contained a pension sharing order as a part of the separation of assets is still astounding.
This is often because one spouse obtains the house (particularly where that spouse cares for the children) and the other spouse (typically the one earning the larger income) retains their pension.
It’s clear to see that many couples and their advisory teams still aren’t giving enough consideration to pensions as a valuable asset in a divorce – so often, the family home is seen as the immediate golden asset to be argued over.
While a pension may not produce any benefits for some years, it could actually hold more value, particularly in circumstances where an ex-partner has a high income and has invested much into their pension, or if they have a final salary pension.
It is the role of the family courts to ensure that both parties separate with the means to make their own living following the divorce, particularly when they approach retirement age.
If an ex-partner is a higher earner, judges would seek to ensure that the individual with smaller personal wealth gets their fair share of assets, including pensions.
Forgetting this could prove to be a costly mistake, particularly if one half of the couple is not fully aware of the value and the benefits of their own and their spouse’s pension plans.
Dividing a pension
Pensions can be divided in a variety of ways when the assets in a divorce are being considered. There are two main approaches which individuals are encouraged to pursue – a pension sharing order and pension offsetting.
A pension sharing order can only be ordered by a family court and specifies the percentage share of any given pension pot.
The managers of the pension pot to be shared must pay the amount generated by this percentage split into a pension fund of the ex-spouse immediately. This then becomes a pension pot of that ex-spouse to own and control as their own.
The second approach is to compare the value of the pension funds with the other assets of the family in order to reach a fair overall division. So the pension fund stays with the owner but the other spouse receives a greater share of the other assets.
This second option is usually only to be considered whether there are other significant assets – perhaps a valuable business – or where it is not possible for the UK courts to make a pension sharing order which is the case with overseas pensions.
Claiming later on
It’s also possible to make a legal claim to an ex-spouse’s pension a number of years after a divorce has been finalised and both parties have gone their separate ways.
However this can generate many issues around the proportion of a pension an ex-partner is entitled to given the value of the pension may have increased since the divorce.
Problems may also arise where the pension fund was built up before the marriage or where the owner of the pension fund is entitled to take his or her benefits earlier than the usual age of 50 and the ex-spouse is not.
Often it may be advantageous for the parties to take advice from a specialist pension actuary who can assist them – and ultimately the court – in reaching a fair outcome to both parties.
Making a clean break
It is also certainly possible that many couples actively avoid staking a claim to a partner’s pension to create a sense of finality to the divorce.
Separating can be a traumatic experience, and the prospect of having to deal with pension pay-outs years before they are expected is one many may seek to avoid.
However, this is exactly what pension sharing orders are intended to avoid so you don’t need to make a call to an ex in retirement age to chase up on their pension benefits – the arrangements concerning pensions, such as the sharing order and offsetting mentioned above, would all have been finalised at the time of divorce.
The parties are then free to get on with their own lives knowing what benefits they are likely to receive in retirement.
Divorcing a spouse is very rarely an easy endeavour, especially in cases of years of marriage with many accumulated shared assets.
Assets as large as pensions should never go ignored, and it’s vital to have a good sense of both yours and an ex-partner’s pensions before entering proceedings.
And even if a pension wasn’t considered as a part of a past divorce, it may not be too late to get this rectified.
Remember to consult experts and obtain appropriate advice on pensions as the true value of the pension assets and how they should be fairly be divided.
Christopher Hames QC is a barrister at 4PB