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Fair share: Prioritising pensions during a divorce
Whether or not it ranks above moving house or losing your job, there is no doubt that going through a divorce is among the most stressful experiences that life can throw at you.
Even when the circumstances are not acrimonious, the ramifications of a decision to separate can be incredibly difficult for those directly involved, as well as for their friends and family.
Amid all the emotional upheaval, it is understandable that financial matters might not necessarily be front of mind, but recent research has highlighted how a failure to consider important assets can lead to divorce settlements being made along uneven monetary lines.
According to the study by Which?, as many as seven in ten (71%) divorcing couples did not include pensions in their financial settlement. This comes despite pension savings making up the largest proportion of a household’s net wealth (42%), ahead of property (36%), financial savings (13%) and physical belongings (9%).
Allocation of assets
While ultimately there is no requirement for pensions to be incorporated within divorce proceedings, separating partners can be entitled to a share of these savings. In England, Wales and Northern Ireland, pensions are typically counted among the financial assets of a marriage (or civil partnership), and in Scotland, the value of wealth, including pensions, accumulated during the marriage is taken into account.
The act of divorcing, however, does not mean that certain rules are automatically applied in relation to the allocation or sharing of these assets. Indeed, this detail is agreed separately, with the aim of arriving at a settlement that is ‘fair and equitable’.
If pensions are not accounted for within this settlement then women can be disproportionately negatively affected because of what is referred to as the ‘gender pension gap’. This is illuminated by analysis from Scottish Widows, which reveals that, on average, men retire with a pension pot of £260,000, while for women the figure is £137,000.
This shortfall of £123,000 can be down to many things but is often the result of women taking time out of the workforce to take on the responsibility of caring for children and relatives.
The role of divorce law
Further to this disparity, there are concerns that relatively recent changes to divorce law are contributing to the issue of pensions being overlooked within financial settlements.
On 6th April 2022, the Divorce, Dissolution and Separation Act 2020 came into force, paving the way for so-called ‘no fault’ divorces. The law was introduced to avoid the need for one party to attribute blame to the other where an immediate divorce is being sought. As such, it is designed to reduce confrontation and accelerate amicable separations.
However, on the back of the reforms, data has shown an increase in the number of online ‘DIY divorce’ applications. Indeed, around 61,500 of these applications were recorded in the whole of 2021, while almost 70,000 were registered in the first nine months of 2022 alone.
Critics have expressed concern that speeding up the divorce process could be leading to hasty separations where either no official agreement or order is made (leaving the door open to future financial wranglings) or where the settlement does not fully consider all assets.
Finding a fair way forward
There are three main ways of managing pensions on divorce or dissolution of a marriage or civil partnership.
- Pensions offsetting, which involves offsetting the value of any pensions against other assets. This could, for example, mean that one partner keeps their pension but the other retains a larger proportion of the family home.
- Pensions sharing, which involves transferring a percentage share of one partner’s pension to the other partner. This can result in the share being transferred to a new or existing pension, or the individual joining the scheme that the share has come from under their own name.
- Pension attachment/earmarking orders, which involve one partner agreeing to pay a portion of their pension income to their former partner after they begin taking their pension. This money could be in the form of pension income, the lump sum or both. (In Scotland it only relates to the lump sum).
Navigating these choices is a complex task, and the situation for divorcees can be further complicated by wider economic factors. The cost-of-living crisis, for example, is causing some to consider the affordability of contributing to retirement savings, while increases to interest rates have left some struggling with the affordability of current and future mortgage repayments.
For those affected, the combination of difficult economic times and delicate personal circumstances can serve to highlight the value of accessing professional help and the importance of reaching a ‘fair and equitable’ agreement that provides a stable financial platform for the future.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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