Pensions are a mystery to many people so it’s a vulnerable area to assist with during divorce. In many instances the pension can be more significant asset than equity in the house so it’s crucial that you receive the right advice and support.
The statistics* show that women who have been through a divorce are far more likely to suffer financial hardship during retirement than those who have not. A huge part of this is that pensions have not been fairly divided between both parties.
A 2016 report by the Chartered Insurance Institute (CII) called “Risk, exposure and resilience to risk in Britain today”, emphasises that divorce and separation are a significant financial risk to women left “vulnerable” by joint decisions made while they were in a long-term relationship. The average divorced woman has less than a third of the pension wealth of the average divorced man, while 10% more divorced women expect to rely on the state pension than men, 41% of whom have an occupational pension. To compound this issue, women are more likely to have more caring responsibilities, and to suffer mental health problems. These upsetting statistics are precisely why I feel so strongly about ensuring people receive the right guidance during divorce.
Broadly speaking there are 4 options available when dealing with pensions in divorce:
- Ignore it because it all looks too complicated. No client of ours will ever take this option. Clearly this shouldn’t be an option at all but we’ve included it as unfortunately this is a common outcome during a divorce.
- Offsetting. Prior to December 2000, pensions were dealt with by offsetting and earmarking. Offsetting simply means that one partner's pension is traded against other assets from the marriage to give each other a ‘fair value’. However, things to look out for when offsetting are underreporting the true value of a pension, or placing more focus on other assets such as the home in favour of ignoring a pension. In many cases the pension is the largest asset and care must be taken to ensure any offsetting takes account of it’s full value.
- Attachment/Earmarking. This means that a proportion of the pension is specified 'earmarked', to go to you from your ex-partners’ pension upon retirement. This does not allow for a clean break and the control of the pension remains with the member. Attachment Orders are not used frequently and this option is becoming increasingly rare.
- Sharing. The Court makes a Sharing Order, the partner will receive a share of the member's pension, called a Pension Credit. The Pension Credit will be a percentage of the pension, and the amount will depend on the circumstances of the case. The pension is essentially split into separate pots for the future. If the pension scheme allows the share to be transferred out, then the share is either transferred into a new pension or ring-fenced as part of the former spouse’s pension scheme. This option offers a clean break because each party has their own separate pension and are not therefore bound to retire at the same time.