Is their pension your most valuable asset in divorce?
Pensions are not considered in many divorce cases, as the family home is often thought of as the most valuable asset when separating wealth, but the average DB transfer value is more than the typical house price.
There is concern that pensions are not being considered in many divorce cases.
The family home is often thought of as the most valuable asset when working out how to separate wealth, but is that becoming a thing of the past?
For divorcing couples who do not go to court there is no automatic right to be told what your spouse’s pensions are worth. Research from Scottish Widows shows that over 70% of couples do not discuss their pensions at all prior to divorce. This seems unwise considering pension rights can be just as valuable as the family home.
For example, the average UK house price in March 2017 was £216,000, whereas typical transfer values reported by Royal London lie in the range of £250,000 – £500,000 for that period. Rises in transfer values are most likely due to transfers from defined benefit schemes, so ignoring such a large asset may have devastating consequences for an ex-spouse.
Are women losing out on significant sums because entitlement to their husbands’ pensions’ is not discussed as part of the divorce process? Only if the divorce case is taken to court will both parties have an obligation to provide full disclosure of all their financial assets. This includes pensions, and only at that point will the pension values be shared with the spouse. Women are potentially missing out on a huge amount, with research showing this could be as much as £5 billion each year.
It’s well known many women end up contributing less to their pensions than their male counterparts. This could be for many reasons such as taking time out of work to look after children, caring for older family members or working lower paid part time work. In addition, many women typically earn less than men and miss out on the same level of auto enrolment contributions paid by employers. Age UK tells us that 40% of women aged 55 – 70 will be heavily reliant on their partners’ income for a comfortable retirement. Women shouldn’t then be penalised further when it comes to sharing assets or pensions upon the breakdown of a marriage.
In some cases women have paid into a joint bank account, allowing their husband to pay into a pension. This is then not included in their divorce, resulting in the loss of all the money they have contributed over the years. Scottish Widows found 16% of women actually lost access to a pension when they got divorced, which suggests this issue may not be uncommon.
Due to the rules surrounding pensions, benefits accrued can only be split and transferred to an ex-spouse under the direction of a court order. Pensions can be accounted for in three ways: offsetting, earmarking and sharing.
Pension sharing was introduced in December 2000 to make it easier for couples to share pension rights and achieve a clean break. A fixed percentage (or monetary amount in Scotland) of the value of a client’s pension fund is awarded to the ex-spouse. There could be many reasons why only 11% of divorce settlements include a pension sharing order but it is imperative that appropriate advice and guidance is provided to individuals to minimise the risk of poor decisions being taken.
There is also a regulatory responsibility to ensure consumers are aware that pensions should be included as part of the divorce process. Whilst it’s not always appropriate for pensions to be shared, common sense tells us they ought to be at least considered.
The number of divorces in 2017 was highest among both men and women aged 45 to 49 years according to the ONS. As many clients going through a divorce will be approaching retirement it makes sense to consider pension values to ensure they receive what they are entitled to.
Engaging the services of a good financial adviser is invaluable, especially in times of difficulty, and can also relieve some of the stresses associated with divorce, particularly if they are familiar with pension rules and common planning pitfalls which a family solicitor may not know.