Written by Rachel Duke
In May 2022, Aviva published research highlighting the following worrying statistics:
- 15% of divorced people did not realise that their pension could be impacted by getting a divorce.
- 34% made no claim on their former partner’s pension and it was not included as an asset in the settlement when they did divorce.
- 8% stated that they did not have their own pension savings as they were relying on their partner to finance their retirement.
- As a result of divorce, 19% said that they will be, or are, significantly worse off in retirement.
- 32% stated that they dipped into their savings to supplement their income.
- 20% said that they used credit cards for everyday living expenses. 18% said that they borrowed from friends and family.
- 15% said that they regularly sold items such as clothing / toys / other household items just to make ends meet.
- 12% confirmed that they were having to go out to work, having not worked prior to their divorce. 10% had to get a second job.
- 12% admitted that they had cut back, or cancelled their pension contributions putting their future retirement income further at risk.
Whilst the above is a long list of different statistics, the significant point to take away is the potential financial hardship that can be caused by divorce and the need to ensure that pensions are taken into account.
The current cost of living crisis only brings these issues and concerns even closer into view.
Retirement should be the time in your life when you can slow down and spend time as you wish with reasonable financial security. Therefore, in the context of divorce, it is essential that the issue of pensions is considered to ensure that one party is not unfairly left with an inadequate income in retirement. It is not uncommon for one party to have a significantly larger pension pot than the other. It will often be a very significant asset which must not be overlooked.
It can be tempting for people in their 30s and 40s not to be concerned about their income in retirement. It can feel a long way off and often meeting current expenses will feel like the priority. However, pension pots take time to build up. As indicated from the results of Aviva’s survey, pension contributions can often be one of the first expenses to go when belts have to be tightened. Even receiving a transfer of what may seem like a relatively small amount of pension value can be an important start to building up your own pension.
If you were the lower earner throughout the marriage, or you spent a number of years not working whilst caring for your children, you most probably had the reasonable and often agreed expectation that your former spouse’s pension would support you both in retirement.
There are a number of different options available in relation to pensions on divorce. They include pension attachment orders (also known as earmarking), pension sharing and off-setting.
For most, off-setting will not be preferable and can be risky. Comparing a £1 in cash with a £1 in a pension fund is likened to comparing apples with pears, particularly with certain types of pensions. A direct benefit pension can be particularly valuable when compared with a direct contribution pension with an apparently similar value. Off-setting pension assets may be appropriate for the relatively few couples who have combined assets that exceed their combined needs. Off-setting could be a suitable option for a younger, dual income couple without children. Advice is essential to consider your best options.
Pensions are a complicated and specialist area. They require professional advice in order to be properly understood.
Pensions on Divorce Experts (PODEs) provide valuable expertise in this area. Your solicitor will be able to advise you on whether input from a PODE is needed and if so, who to choose.
Since the advent of pension sharing orders in December 2000, pension attachment orders are rare. They can hold a number of risks for the receiving party. They are only payable from the point that the paying party takes his or her pension. The paying party remains in control of when that happens. They do not provide the receiving party with their own fund and so is not a type of ‘clean break’ order that severs financial ties. Pension attachment orders can be varied and so do not provide certainty. Importantly, a pension attachment order lapses when the paying party dies. From the paying party’s perspective, he or she will continue to pay the tax on the entire fund, including the party paid to their ex-spouse.
Pension sharing orders are now the most common type of pension order. They enable pensions to be split at the time of the divorce. A set percentage of the paying party’s fund is effectively withdrawn from his or her fund and becomes a pension “credit” for the receiving party to transfer to his or her own scheme. This can be an entirely new fund.
However tempting it may be to prioritise other issues, ignore pensions on divorce at your own peril.
To receive advice on this or any other Family Law issue, please contact our Family Team on 020 8304 4884 or family@alettashaw.co.uk