Are you Getting a Fair Split? | Pensions in Divorce
Since the Covid-19 pandemic, and with the introduction of no-fault divorce, there has been a significant surge in divorce enquiries. An increase in couples seeking quick DIY divorces is leading to many individuals not getting the fair divide in assets they initially believe they’re getting. In many cases, some of the biggest marital assets such as pensions, are being overlooked.
It might feel like the pension belongs to your ex, but this is not the case. When you are married or in a civil partnership any and all pensions are part of the matrimonial pot. This stands regardless of whose name is on the pension plan. A pension can only be in one person’s name and often that person will see it as theirs, especially if they built it up over a long career. However, many families decide that one parent will take more responsibility for the care of the children while the other focuses on earning money or a career, giving that person more of an opportunity to build a pension. The law treats these contributions to the family as equal. So, try not to view the pension as just your ex’s, or just yours, but more as one part of the financial jigsaw that needs piecing together.
Splitting your pensions in a divorce is a difficult process, that is often not clear-cut. An expert solicitor alongside a financial advisor, can help you with any pension splitting, so you can assure that you and your family are financially taken care of into the future.
In this Article:
- The Dangers of ‘DIY Divorce’
- Overlooking Pensions in Divorce
- Understanding the True Value of Pensions in Divorce
- Women and Pension Poverty
- Why You Should Get Expert Help from an Employment Solicitor
- How Does the Court Split Pensions in Divorce?
- Getting Started with Your Pension Sharing Order
The Dangers of ‘DIY Divorce’
It has been just over a year since the introduction of no-fault divorce which provides a quicker route to divorce, by eliminating levy allegations against your ex.
The new route for divorce has been widely welcomed and long overdue. The non-confrontational nature of no-fault divorce, paired with the improved efficiency of the online portal for divorce, has resulted in a spike in couples submitting the application themselves, commonly termed ‘DIY divorces.’
Although DIY divorces provide a quick method for divorce, they can often result in one party not receiving all their entitled to. This is because, during a DIY divorce, couples often try to reach a financial settlement without the aid of a solicitor or financial advisor, resulting in areas of finances being overlooked and ill-formed decisions being made. What might seem like a good financial agreement in the moment, can often result in one party falling into pension poverty in the future.
Overlooking Pensions in Divorce
In trying to achieve a ‘clean break,’ the most common area to be overlooked is the division of pensions. The division of pensions in divorce can be a complex area of law and a simple split of assets can often be a lot more complicated than initially perceived.
Our family solicitors observe that in many divorces the priority of the primary carer is to secure a suitable family home or have the option to move to an appropriate house. This decision allows for immediate family security and reduced disruption to the children. However, agreeing on a larger share of the family home in a trade-off for less of the pension share can leave the primary carer missing out on significantly more of what they’re owed.
It’s important not to sell yourself short. Pensions are often worth a lot more than the family home. In many cases, one party will settle on one party receiving the same sum in a pension that the other receives in a share of the home.
Understanding the True Value of Pensions in Divorce
When it comes to pensions and divorce, a pension’s value is initially valued on its Cash Equivalent (CE) value. In the case of defined contribution schemes like money purchase schemes, the CE value is generally similar to the total value of the pension fund, which is based on the contributions made by both the employee and employer, along with any investment growth.
Calculating the value of a pension can become much more complex depending on the type of pension. For final salary and career average (defined benefit) schemes, CE value is calculated differently. Instead, the CE represents the amount of money the pension fund would offer to a member who chooses to leave the scheme. This value can be significantly different from the actual value of the pension fund. The impact of this difference is most evident in the estimated income that the scheme would provide to the pension holder.
As a general rule, where defined benefits schemes and defined contributions schemes of a similar value, the defined benefits scheme will often pay more income come retirement than the defined contributions scheme.
In most cases of DIY divorce, decisions regarding pensions are often made with thought to the value of the CE instead of considering how much value the CE will produce or how much it costs to replicate any lost benefits on the open market. Therefore, even though the division of pensions may feel fair, the non-pension holder may be foregoing a large claim to income in retirement.
Women and Pension Poverty
It’s not uncommon to see women fall victim to the unfair division of pensions in divorce. Jessica Beard, from Financial Mail on Sunday states that ‘women get a tenth of what they’re owed from divorce. Although this rule does not apply to everyone, oftentimes women are the primary carer. Their role can often be to stay in the family house or rehouse with the children and often take on less than their husbands in order to care for the children. As a result, it’s common to see women have less pension provision than their husbands.
According to a study conducted by the University of Manchester in 2021, it was found that among divorcees aged 55-64, men had an average total private pension fund value of £100,000, whereas women had accumulated only £19,000 on average. This significant disparity puts many women at risk of experiencing financial difficulties and potential poverty during their retirement years.
Why You Should Get Expert Help from an Employment Solicitor
According to the Office for National Statistics, pensions are frequently the largest asset in a marriage after property, comprising 42 percent of household wealth. With only 22% of couples seeking a pension-sharing order, many individuals are missing out on a fair settlement. Even in cases where pensions are taken into account, there is a high likelihood of inaccurately valuing them.
In a recently resolved case, Joanne Lewis realized that she should have received nearly £500,000 as part of her divorce settlement with her husband. Initially, in 2014, she accepted a clean break settlement and walked away with £62,000, believing it to be a fair deal. However, it later came to light that her solicitor had not considered pension negotiations during the settlement process. As a result, Joanne received only a small fraction, equivalent to a tenth of the amount she was actually entitled to.
Last month, Joanne won a four-year battle against her solicitor, receiving £400,000.
Joanne’s case exemplifies the need for an expert solicitor and financial advisor to help properly evaluate the size of a pension and split it fairly. In another case, one woman initially believed her husband’s pension to be worth £750,000 if he cashed it today. However, on further investigation with the help of a solicitor and financial advisor, it was discovered that her husband’s pension was worth £1.6 million.
Instead of assessing the current cash value, it is important to consider the amount needed to purchase an annuity that guarantees a consistent income throughout retirement. This can be significantly higher, up to 60% more, than the cash value alone. Taking this broader perspective ensures a more accurate assessment of the pension’s worth and its potential income-generating capacity for the future.
How Does the Court Split Pensions in Divorce?
There are various Court Orders available to ensure a clean break in your divorce finances. Our Family Law and Divorce Solicitors are available to discuss your situation, guide you through the available options, and provide advice tailored to your specific circumstances.
Whether you have concerns about having a smaller pension compared to your former partner or need assistance with pension sharing after divorce, we are here to assist you.
Our expert solicitors can help you with:
Pension sharing is often chosen when there is a significant difference in pension values between divorcing parties. In pension offsetting, one person receives a greater share of other marital assets to balance out the value of the pension.
Offsetting does not involve the Court issuing any specific Pension Orders, and each pension remains in the individual’s respective name with unchanged values.
Pension offsetting is commonly chosen when one person prioritizes retaining the family home over sharing future pension benefits. It can also be an option in cases where the pension rights cannot be divided, such as when dealing with an overseas pension or if both parties are young, if the marriage or civil partnership was short-lived, or if the pension funds are relatively small.
Pension sharing is a process where one individual receives a portion of the other person’s pension. This sum of the pension is then transferred into their own name. Pension sharing allows separate funds to be created and therefore each individual’s pension can be controlled separately.
To initiate pension sharing, an application for a Pension Sharing Order must be made to the Court. This approach allows flexibility in terms of accessing the pensions at different times. It is often considered the fairest and most chosen option, especially in cases of divorce later in life or when there is a significant disparity between the pension amounts.
Deferred Pension Sharing
With a Deferred Pension Sharing Order, the sharing of the pension is postponed to a later date. If one party is already receiving pension payments, the younger individual will receive their share when they reach their own retirement age.
A Pension Attachment Order allows for one party to receive funds and/ or income stream from the other person’s pension once the pension holder retires.
It’s important to note that this arrangement does not achieve a clean break. This is because the recipient can only access their share when the other party retires, rather than being able to make independent decisions regarding their own retirement. This option attaches the recipient’s financial interests to the existing pension arrangement of the other person.
Getting Started with Your Pension Sharing Order
It is crucial for individuals going through a divorce to inform themselves about their financial rights and options. They should seek advice to ensure that they consider not only their present financial circumstances but also how their future, including the medium and long-term, as well as retirement, will be affected. By taking this proactive approach, divorcing parties can make informed decisions and plan accordingly for their financial well-being beyond the divorce.
All advice is correct at time of publication.