The first Monday in January is widely known as 'Divorce Day', as family lawyers see an increase in enquiries. There are of course a number of emotional and practical things to think about when it comes to going through a divorce, and the pensions of those involved are not typically something that is front of mind.
There is a common misconception that pensions belong to the person who owns them. They aren’t considered in the same way as an ISA, for example, which is also held individually. However, pensions are an asset like any other and form part of the assets to be shared on divorce.
Clare Moffat, pensions expert at Royal London gives some insights on what you need to consider about any pension assets when working through a divorce:
Consider pension sharing, not offsetting
"The most common way for pensions to be dealt with on divorce is something called offsetting. This means that you obtain the value of any assets and then each person takes certain assets. For example, if the house is worth £400,000 and the pension value is £400,000 then one person might take the house and one might take the pension. Men statistically have larger pension pots but pensions can’t be valued in the same way as other assets. It means putting a value on something today and not how much it will give in the future. That £400,000 pension might be a defined benefit pension which means there will be a guaranteed income until the person dies, which means it’s potentially worth a lot more than the house. A house can’t give a regular income in retirement and downsizing might be difficult.
"The fairest way to deal with pensions is something called pension sharing. This means that the pension is divided. This might not be 50/50, it depends on the other assets too and whether there are any children to support. The needs of children are prioritised. Sharing ends up with both people owning part of the pension."
Don’t be put off by court order costs
"Typically, only 11% of divorces end in pension sharing. One of the reasons for this is that it needs a court order and it can take more time which means extra cost. But that cost could be well worth it in years to come.
"This is especially true for people in the public sector – where there are an estimated 6 million employees who will still have those defined benefit pensions, the value of which is not always understood. A £100,000 defined contribution scheme pension and a £100,000 public sector pension are not equivalent because the public sector pension is making a promise to pay out until you die. A defined contribution pension is a pot of money, and it is up to the person to decide what they do with it."
Take financial advice
"Royal London research found that almost a third (29%) of women rely solely on the State Pension and women who have been divorced have the lowest amount of pension wealth. Divorced men have less in retirement than married men, but the amount they have is still far above divorced women.
"Taking financial advice is crucial. This might seem like another cost at an expensive time, but financial advisers understand pensions. When couples are much younger, have no children and have only been married briefly then a low-cost DIY divorce might be a good idea. But as soon as there are more assets and public sector pensions are involved then financial advice is key and will mean better outcomes. Going through a divorce is difficult emotionally and can often leave people vulnerable. Having a financial settlement that looks both at today, and at retirement, is important, and will mean a fairer outcome for both parties."
The decrease in divorce
"It’s worth remembering that divorce is on the decrease. One of the reasons for this is the increase in the number of couples who choose to live together but not formally marry. This brings additional challenges as there are limited legal rights when a cohabiting relationship ends. That decision not to walk down the aisle can end up costing one partner, in many cases the female, heavily in the event of separation."
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