The average age when men divorce is 47 and for women it is 44. This means that the ‘average couple’ getting divorces will have had over two decades to build up their pensions with a further two decades to retirement. The first twenty years of pension contributions is rarely long enough to have created a decent pension fund to see you through your golden years, but if you are getting divorced, pensions are still likely to be a vital part of your financial settlement. According to a recent survey of more than 1,000 divorced people, more than a third made no claim on their former spouse’s pension and one in six had no idea their pension could be impacted by the breakdown of their marriage.
The harsh consequences of not including pensions in a divorce financial settlement
Missing out on pension wealth can result in serious financial hardship for divorced people when they retire, with women more likely to suffer than men. A 2018 policy report ‘For love and money: Women’s pensions, expenditure and decision-making in retirement’ by Age Concern revealed that 40 per cent of women aged between 55 and 70 were heavily reliant on their partner’s income to ensure a comfortable retirement. Often this is because women have taken time out of the workplace to have children and when they do return, may only work part-time. The consequence is that the pension they have built up will be less than their husband’s.
When it comes to dividing pensions on divorce expert legal and financial advice is essential. Dividing pensions is complicated. For example, there is a vast difference between the values of occupational pensions and money purchase pensions. Comparing their cash equivalent values is like comparing apples and pears and could leave one party seriously short changed.
How can pensions be divided on divorce?
If you and your spouse divorce your solicitor can advise you on the options:
A Pension Sharing Order provides one spouse with a percentage share (referred to as a pension credit) of their ex-spouse’s pension pot. The pension credit can either be assigned to an existing or new pension scheme or, in some cases, kept within the existing scheme. Transfer options will depend on the particular pension. The receiving spouse will have a separate pension in their own right and this provides for a clean break concerning pensions.
One party retains their entire pension in exchange for letting the other have liquid assets and may, for example, let the family home be kept by one party rather than it having to be sold. Unless the party keeping their pension is of retirement age, their pension will not be accessible and even when they reach retirement age, tax is payable on pension income. Therefore, when offsetting pensions a discount has to be applied to take into account the tax element as well as the delay before the pension can be taken.
Pension attachment (or pension earmarking)
A Pension Attachment Order earmarks a proportion of the pension income and/or the tax free lump sum to benefit the other spouse. The receiving spouse will not get a separate pension in their own right as the pension remains with the spouse who had it in the first place and the other spouse will only receive their proportion of the pension when it starts being paid out.
This option comes with the risk that when the pension holder dies, the receiving spouse’s pension will end. If the spouse dies before the pension pays out the other spouse may never receive their share , although it may be possible to earmark the death benefits to benefit the spouse who would otherwise lose out.
All of the above options have advantages and disadvantages. An experienced divorce solicitor will ensure you fully understand what each choice entails and advise you on the best option to help secure your financial future.
For middle aged and older couples, pensions are as important as property and savings when it comes to a divorce financial settlement. Working out pension entitlement and the best option for dividing plans often requires not only the knowledge of a divorce solicitor, but also specialist financial advisors and actuaries. Expert advice is essential in cases involving international pension rights.
It is imperative that your divorce financial settlement provides what is fair, including a portion of your spouse’s pension. This can make the difference between a comfortable retirement and one of constant worry and hardship.
If you are affected by similar issues or would like to have a related discussion in confidence, please contact a member of the Family team direct or email firstname.lastname@example.org or call us direct on 020 7091 2869.
The above is accurate as of 30 May 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.