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Longer Life, Smaller Pension?

Every year, as part of its annual Women and Retirement Report, Scottish Widows conducts research to establish the specific challenges facing women as they prepare for retirement. This year’s 13th annual report confirms what we have already known for a long time, that women fall behind men in terms of adequate pension savings. They are more likely to miss out on automatic enrolment (AE) contributions paid by their employers because they typically earn less, and they will miss out on contributions if they take time out of work to look after children. However, it is the second finding that concerns us most as specialist family lawyers; women are also less likely to have considered their savings options and pension rights during a divorce.

Given that 42% of marriages end in divorce, it is a shocking statistic that Scottish Widows found 71% of couples did not discuss pensions as part of their divorce settlement. Scottish Widows found that whilst 56% of married people fight for a fair share of jointly owned property and 36% of married people would want to share joint savings, more people are worried about losing the family pet (13%) than want a fair share of their partner’s pension (9%), even though a married couple is likely to have approximately £132,000 in pension savings, which equates to around 5 times the average UK salary (£26,000). Pension pots are often the second largest, if not the largest asset a couple owns.

Even though pension sharing was introduced almost two decades ago, by the Welfare Reform and Pensions Act 1999, Scottish Widows found that 48% of women have no idea what happens to pensions when couples get divorced. This lack of general knowledge about pension-related legalities would appear to be contributing to women’s worsening retirement planning following divorce. Scottish Widows also found that 16% of women lost access to a pension when they split from a partner and 10% of women who lost pension access in a divorce intend to rely completely on the State Pension.

It is important for women to take steps to understand their finances and prepare for later life, in case they can’t always rely on their current partner. It is also important for men and women to understand the legalities of what happens to pension pots during divorce proceedings so that pensions are treated like the high value assets that they truly are.

The division of a pension pot can only happen with a pension sharing (or, to a less extent, a pension attachment order) order from court, as part of your divorce if you are married or in a civil partnership. However, this doesn’t mean that you will be required to give evidence in court. In most cases, people come to an agreement which means you only need a ‘consent order’ from the court to instruct the pension provider to make the necessary changes.

The court can deal with pension assets in one of three ways. Firstly, one party can be given a percentage share of the other’s pension pot. This is called pension sharing where one party receives a specified percentage of the value of the other persons’ pension. That money is called a pension credit, with the corresponding ‘pension debt’ being paid from the pension holder’s scheme into a new pension or an existing pension. This is the most common way to deal with pensions.

Alternatively, the value of a pension can be offset against other assets. This is called pension offsetting and can involve one of you keeping the pension pot in exchange for a smaller proportion of the family home or other significant assets.

Finally, the court can order that a proportion of your pension is paid to your former partner. This is known as pension attachment or earmarking. This is like a maintenance payment, paid directly from one person’s pension pot to their former spouse or civil partner and is payable when the pension is in payment.

Pensions first need to be valued before an agreement can be reached over how to deal with them. The pension provider will give a ‘cash equivalent value’ (CE) when asked, which represents an estimate of the pension’s value on today’s open market. However, the CE is frequently insufficient information alone when defining the future value and management of the pension fund and often it is wise to seek the advice of an actuary before making decisions.

There are broadly two types of pension scheme – defined benefit schemes (e.g. final salary schemes) and money purchase pensions (e.g. defined contribution schemes). While some money purchase pensions can be quite straightforward and the CE can be a useful measurement tool, actuarial advice might still be appropriate. A 50:50 split of pension provision would not necessarily be a fair split for parties who differ significantly in age, for example, because the younger party is likely to have longer to invest, prior to retirement.

Other pensions such as defined benefit schemes can be extremely valuable and complex. In those cases, CEs will rarely represent a fair reflection of the value of the pension benefits, and a 50:50 split of the pension capital value could result in very different and potentially unfair outcomes for the parties.

In all cases it is important to understand the nature of the pension schemes held by you or your spouse and what the options are for dividing those schemes in a fair way. At Cambridge Family Law Practice, we have significant experience in dealing with assets of this nature and advising clients on how pensions can be divided or whether it is appropriate to instruct an actuary to assist.

If you have any questions about what you’ve read here or any family law issue, you can call us on 01223 443333 and make an appointment to speak to Simon, Adam, Tricia, Sue, or Gail.