Pensions On Divorce

A Which? Survey carried out in November 2021 has reported that only 15% of divorcing couples include pensions in their financial settlement.

According to the Office of National Statistics, pensions are often the single biggest asset that a couple is likely to have, making up 42% of total household wealth whilst, the share of wealth in property is only 36%.

If the Which? Survey, which included 453 people, is representative of the outcomes for divorcing couples across the country, it means that huge numbers of spouses could be missing out on a share of the most valuable asset of the marriage leaving them with an unfair divorce settlement and in potential financial difficulty on retirement.

Given that a recent study by the University of Manchester has shown that, on average, married women between the ages of 65 and 69 have only £28,000 of pension wealth whilst men have almost ten times this, it is likely that those missing out on divorce are women.

The Court has the power to make various orders in respect of pensions on divorce.

What is a pension sharing order?

A pension sharing order provides for a percentage of one party’s pension provision to be transferred into a pension pot in the other spouse’s name.  Pension sharing allows for a clean break, severing financial ties between the parties making the outcome more appealing to the Court and couples that no longer wish to have intertwined finances.

The receiving spouse can draw down on their pension whenever they decide to retire.  It is their own pension and they can treat it and invest it as they wish.  In considering what percentage one party may need by way of a pension share, the Court may require the advice of pensions on divorce experts such as an actuary who will undertake the complex calculations required to determine how the parties’ income on retirement can be equalised.

Equalising the capital values of a couples’ pension assets will not necessarily mean that they will derive the same income when it comes to drawing down on those pensions as this depends on the type of schemes in which those pensions are invested.

An alternative to pension sharing is offsetting which provides for a spouse’s interest in their husband or wife’s more substantial pension assets to receive capital in lieu of their matrimonial interest in their spouse’s pension.  This could mean, for example, that one party receives more of the capital from the marriage or that the family property is transferred to them to ensure that their housing needs are met instead of a share in pension assets.

Whilst offsetting, according to a report published by The Family Justice Council in 2019 (A Guide to the Treatment of Pensions on Divorce), is the most commonly adopted remedy for dealing with pensions in divorce cases, it is important that proper consideration is given to whether any agreement reached is fair and will meet the parties’ needs on retirement.

Offsetting is often an appealing outcome for spouses who are the primary carer of the family who is prepared to give up some or all of their claims to the future benefit of a pension.  It can however be a complex process to ensure that the result achieved is fair.  It is important that any spouse who is potentially going to receive capital instead of pension is aware of the value of the assets they may be losing in not seeking a share of pensionable assets.  Again, evidence from a pension on divorce experts may be necessary.

What is a pension attachment order?

In addition to offsetting and pension sharing orders, the Court also has the power to make pension attachment orders.  There has been a sharp decline in the number of pension attachment orders made since the advent of pension sharing which was introduced by the Welfare Reform and Pensions Act 1999 because of the fact that pension attachment does not provide for a clean break and leaves the spouse in whose favour a pensions attachment order is made reliant of their ex-spouse in terms of when they can take their pension and when those benefits cease.

When a pension attachment order is made, pension lump sums or income will only be paid when the spouse to whom the pension benefits belong takes their pension.  The delay between a pension attachment order being made and spouses reaching pensionable age can also mean that there is huge uncertainty as to what the receiving spouse’s income will be on retirement. They have no control of these assets as the pension holder retains control over the choice of investments and when the pension is taken.  When the spouse who holds the pension dies, the pension income dies with them.

It is important, particularly given the proportion of wealth that pensions make up, that they are not simply ignored on divorce. Pensions are, however, complex and specialist advice from lawyers, pensions on divorce experts, and financial advisors are often needed in divorce proceedings particularly when the pensions in dispute have a more than modest value.  Whilst obtaining this specialist advice does come at a cost, that cost is entirely proportionate when considering fairness and the dire financial straits that one party may be left in retirement following a divorce if pension assets are not considered properly in any financial settlement.

As with any other assets, in most cases, the needs of the parties, including their income needs on retirement will be one of the most important considerations of the Court.