Do not neglect pensions in divorce settlements

  • Describe the issues with pension sharing on divorce
  • Explain when an Pode is required
  • Explain how pensions are distributed on divorce
Do not neglect pensions in divorce settlements

It is an odd line of work being a divorce lawyer. 

We are here to advocate the best result for our clients who are very often understandably rather bitter about their soon-to-be former spouse. Emotions can run high (and that is just the clients). 

One theme that crops up time and again is not wanting to leave the relationship with less than what is seen as ‘fair dues’.

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It would be anathema to the typical client, for example, to let their ex take a £1mn property without having half of the value for themselves. 

Yet that is precisely what we see happening repeatedly with pensions, particularly when we are called in late in the day – or worse, after the event (the financial settlement) – and asked to make good what is, at heart, a bad job.

There are probably various reasons behind pensions being neglected in financial settlements. Fundamentally, they all boil down to the same reason: a lack of appreciation of their true value.

Pensions are often the largest assets held by divorcing couples, often exceeding the equity in property or a business. Yet they are often overlooked. 

What we regularly hear from clients, typically wives, is that they see their husband’s pension very much as being ‘his, because he’s earned it’.

We could not disagree more: the basis of our courts’ approach to division of assets upon divorce is that what is earned during the marriage falls in the first place to be shared equally between the spouses.  

In other words, a pension earned by one party during the marriage will be treated as being the joint fruit of the matrimonial partnership and thus be divided equally between the parties on their separation. This is all subject to any overriding ‘needs’ argument. 

Research conducted by Hilary Woodward alongside Mark Sefton in 2014 (carried out on behalf of the Nuffield Foundation) found:

  1. In 20 per cent of court file cases examined within the study, neither party disclosed any pension other than a basic state pension.
  2. In 66 per cent of cases, one or both parties disclosed a pension other than basic state pension but no pension order was made.
  3. In just 14 per cent of cases examined within the study a pension sharing order was made. 

The report also noted:

  1. In general, pension orders were more likely to be made between older parties from longer marriages.
  2. Pension sharing orders were more likely to be made when both parties were legally represented.
  3. Practitioners and judges saw pension sharing as a positive addition to financial remedies on divorce but that offsetting pensions against other non-pension assets was still seen as the most common way of dealing with pensions in general. 

This is a matter of concern to practitioners in the field – the second point above only illustrates that we, as a profession, see pensions as being of great significance.

Following on from the findings above, the Pension Advisory Group provided its report on pension sharing in 2019, with a detailed guide on dealing with pensions within financial remedies proceedings. 

Despite this invaluable guidance having now been widely circulated, there still seems to be some reluctance to engage with pension sharing on divorce and common confusion in respect of how parties should deal with their respective pensions, including how much is available to them to split and how to obtain an accurate valuation for pension sharing purposes.  

Very often, the quoted ‘transfer values’ of defined benefit schemes (also known as ‘final salary’ schemes) significantly understate the value of the benefits in the hand of the receiving spouse.