Don’t overlook a pension in the event of divorce

A pension is often the second-biggest asset married couples have but, for high earners in good workplace schemes, it could well be the biggest.

Despite the monetary value of our pensions and the security they can bring to our later life, they are all too often overlooked when couples divorce and finances are split.

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According to interactive investor’s Great British Retirement Survey 2023, a shocking 67% of divorcees did not discuss pensions during their divorce proceedings.

However, not incorporating a pension into a divorce settlement can have a catastrophic impact on many divorcees’ retirement finances. Women often bear the brunt, if they were the primary caregiver in the family and either stopped working, or worked part-time, during the marriage.

But men can be left short too if they weren’t the biggest earner during the relationship or if they stayed home to look after children.

Rhiannon Ford, a former family lawyer who now runs her own divorce coaching consultancy, says: “The wife – although not always – will have often given up her career, which can leave her very vulnerable and it can be difficult to replenish her pension if she has the children, even if she does go back to work.”

Why are pensions being overlooked?

There are numerous reasons why pensions are dismissed or overlooked during the divorce process.

When couples are divorcing, the focus is very often on the family’s short-term needs. “The house is often the priority,” says Ford, especially for a primary caregiver who may still have children at home.

During the emotional upheaval of a divorce – separating couples will also be keen to get the finances sorted as quickly as possible, so that they can move on. Even if pensions do get brought up, they can often be dismissed as too problematic, says Ford. “It delays progress being made. People get inpatient and want to rush things through.”

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Making matters worse, pensions will often not be viewed as a matrimonial asset, in the same way as the family home or a joint savings account. “I’ve seen some clients get very possessive about their pension,” says Ford, “they see it as something that is very personal to them and feel aggrieved about sharing it.”

Consequently, some people will worry that they will be considered greedy if they push for a share in their ex’s pension, especially when retirement is years down the line. “People can really underestimate the pension’s value,” she adds.

Why pension sharing matters

While one party might not be willing to relinquish any of the pension and another might not have the desire to fight for it, it’s important for divorce settlements to be fair.

There is already a significant gender pension gap. According to a recent study by Now Pensions, women are currently retiring with a pension worth an average £69,000, compared to £205,000 for men – thanks to lower earnings and more years out of the workplace. For women to keep pace they would need to start paying into their pension from the age of three, the report claimed.

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Take the financial challenges posed by a divorce into account and the position for many women becomes even more bleak.

How can pensions be split?

There are two ways a pension can be split – both of which can only be instructed by a court (Minutes in Scotland):

• Pension sharing order: here, a pension is split between the two parties. The recipient doesn’t get the money as cash, rather they get a credit paid into a separate pension account. They can then manage their share independently of their ex. The major advantages of this approach are that it provides a clean break for both parties and there won’t be any implications if either of you remarries or dies.
• Pension attachment (or earmarking order in Scotland): with this more complicated arrangement, a share of the pension (potentially including death benefits and tax-free cash as well as income) is paid to the recipient. However, this can only begin once the original member starts taking money from their pension. As such, there isn’t a clean break for the couple after the divorce. Furthermore, the recipient doesn’t get any control over their share and may not know how much they will get or when. Payments will also end if the recipient remarries or the member dies. In the worst-case scenario, it means that if the original member didn’t take any benefits out of the pension before they died, their ex might not get any benefit from it. These problems mean pension-sharing orders are now more common than pension attachment.

A third approach is to not split the pension at all and instead grant a greater share of another asset – often the family home – to one partner in lieu of rights to their ex’s retirement pot.

This approach is referred to as offsetting. It’s simple and straightforward and offers a clean break. For the partner keeping the house, it also tackles immediate concerns about where they (and often the kids) will live. The downside is that it’s difficult to strike a fair balance and one partner may often still end up with little or no pension.

Getting a fair deal

Ford always encourages her clients to get their retirement savings professionally valued by an independent expert, rather than relying on cash equivalent values from pension providers. This takes time and it brings additional cost. But while it can put many couples off, she says it’s a vital step. “You only get one chance to get the financial settlement right.”

This specialist will value all the pensions the couple has and will take into account entitlement to tax-free cash, retirement income as well as death benefits. It’s particularly complicated if there are any defined benefit (DB) pensions in the mix, which are much harder to accurately value.

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The report will not only provide accurate valuations of each pension, it can also include different proposals for how they can be split. This then gives lawyers the level of detail they need to negotiate a fair settlement.

While the simplicity of offsetting appeals to many separating couples, Ford says its best to avoid situations where parties are only getting one asset. She says: “All pension and no capital doesn’t make any sense. I would also be apprehensive about anyone walking away without any pension. It’s never a good idea to have all your eggs in one basket.”

She adds: “It’s common for wives to say the house is her priority and that she’ll downsize when the kids leave home and use that money for her pension. But people often have unrealistic expectations of how much money that will provide them with for their future and it’s not guaranteed. We don’t know what the property market will do or how much money they will need.”