PensionsAug 29 2019

Change means pensions shouldn’t be forgotten in divorce

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Pensions in the context of divorce has been making the headlines regularly in recent weeks, and for good reason.

The now ex-minister for women & equalities, Penny Mordaunt, announced the government will be updating the online divorce process to ensure couples are aware of the benefits of pension sharing, citing that “only 36 per cent of asset sharing agreements include sharing of pensions - this means women lose out on financial security later in life.”

The news was generally welcomed, as it has been flagged in recent years that pensions can be left out of divorce negotiations, with women often negatively impacted and out of pocket.

Research from Scottish Widows in 2017 showed that the pension discrepancy between genders is significant – almost double, in fact; men save £125,000 on average, compared to £64,000 for women.

Further good news relating to pensions and divorce came in the form of new guidance from the Pension Advisory Group - which is aimed at family judges, lawyers and pension experts and worth a read for anyone advising in this area.

This guidance is designed to encourage fairer settlements and “to make outcomes more predictable and consistent for divorcing couples, their advisers, and judges across England and Wales who deal with these issues daily.”

Research which led to this guide being published, revealed that of the 369 court files studied, 80 per cent contained at least one relevant pension and yet only 14 per cent contained a pension order.

The guide underlines the importance of including a pension in the final divorce settlement, emphasising that "ignoring the pensions or agreeing to ignore the pensions is not an option."

But how have we got to this position and why are pensions so often overlooked in a divorce?

And if a pension has been disregarded in the divorce negotiations, is there anything an individual can do to claw back the money they’re entitled to?

After the family home, pension pots are often a family’s most valuable asset but confusion over how to split a pension and even how much is available can often factor into a couple neglecting this asset.

Furthermore, sometimes a spouse may be unaware that they’re entitled to a share of their husband or wife’s pension, feel like it’s not theirs to take, or would prefer a ‘clean break’ and mistakenly believe that receiving half of their spouse’s pension will mean they have to get back in touch – especially off-putting if the couple is young and retirement is a long way away.

Although splitting a pension in a divorce can be complex (for example, public sector schemes), it’s often a fairly simple process with a few options available such as pension sharing.

This is where the court issues an order which states how much of the pension rights or fund will be shared and this amount will be expressed as a percentage, or a pension attachment order, when the court orders one half of the divorcing couple to pay a proportion of their pension benefits to their ex-spouse when those pension benefits are drawn.

While delay is not to be encouraged, there are occasions where a spouse brings a claim in respect of a pension some years after the divorce itself has been finalised as part of a financial remedies application.

That often raises questions as to whether pension contributions made after the couple's separation should be included in the calculation as to the appropriate pension share – or even contributions before they married - or whether only marital contributions should be shared.

There is no hard and fast rule, and much depends on what pension income is produced with and without those elements in deciding what is fair.

That of course requires guidance from an actuary who can be instructed (usually jointly) to prepare a report to assist everyone.

To summarise, the combination of the recent media exposure, and the initiative from the government - coupled with the new guidance - should prove helpful in ensuring awareness around pensions is raised and especially in relation to divorce.

Stephen Lyon is a barrister at 4PB