Private pension pots make up the largest portion of household wealth in the UK. For anyone getting divorced the issue of how to divide the pension will play a big part in any discussions about a financial settlement. For legal and financial advisors, the pension is also likely to be the most complex family asset to ascribe a value to. Often a valuation will require sophisticated financial and actuarial analysis.
Getting a correct valuation and deciding how to treat the pension funds after divorce matters. This is particularly the case when we consider that individuals are getting divorced when they are older. According to the Office for National Statistics the age of divorcing couples reached an all-time high in 2020. This means pensions at the time of divorce are likely to be larger because individuals will have contributed over a considerable number of working years. Consequently, accurate analysis and valuation of the funds is even more crucial to a fair financial outcome.
Here we’ll look at research from 2022 by insurer Aviva that highlights some of the prevailing attitudes to pensions and divorce. We’ll also explain what you need to consider in relation to your or your spouse’s pension, and we’ll look at how family law judges treat pensions in the divorce cases that make it to court.
Pensions And Divorce
In 2022 insurer Aviva published research about people’s attitude to pensions when they divorce. It uncovered some fairly startling views. For example, the research revealed that:
- 15% of divorced people didn’t realise their pension could be impacted by getting divorced
- More than a third of individuals (34%) made no claim on their former partner’s pension at the time of divorce, and the pension was not included as an asset in the settlement when they did divorce
- As a result of divorce, 19% of people say they will be, or are, significantly worse off in retirement.
The potential day-to-day impact of an inadequate financial settlement, potentially exacerbated by not securing an equitable share of a pension on divorce was also revealed:
- To supplement their income following a divorce, a third of divorcees (32%) said they dipped into their savings
- One in five (20%) used credit cards for everyday living expenses
- A similar number (18%) borrowed from friends or family
- 12% of respondents admitted to having to go out to work, having not worked before their divorce, or get a second job
- 12% cut back, or cancelled, their pension contributions – putting their future retirement income further at risk
These statistics highlight the need to think carefully about any pensions that form part of the matrimonial pot on divorce. Ignoring the value of a pension is the same as leaving out other assets like the family home in calculating your financial entitlement. You should be particularly cautious if you are getting divorced at a later stage in life when pensions are more likely to have accumulated significant value.
Division Of Pensions On Divorce
So what are the rules about dividing pensions when you divorce? While the relevant legislation (The Matrimonial Cause Act, 1973) contains detailed provisions about pension sharing orders, the court has an overall discretion to have regard to ‘all the circumstances of the case’ when deciding on how to deal with pensions.
This wide discretion, coupled with the scarcity of reported cases on pensions and divorce can complicate the job of predicting your precise legal entitlement as regards any pension. This is one reason why it is always worthwhile investing in expert legal advice before agreeing anything with your spouse in relation to your pension.
We deal more with how courts divide pensions here.
Negotiating A Fair Pension Settlement
Often the issue of pension sharing is dealt with privately between spouses and their legal advisors. Removing the stress of attending court and reducing court costs can encourage parties to reach agreement. That said, you should never sacrifice a fair pension settlement for the sake of reaching an overall agreement. At Brookman we are members of Resolution and work hard to find constructive, non-confrontational solutions to even the most hotly contested pension disputes.
Note that even when you reach a private pension sharing agreement this must be formalised by the court. Without a court order the administrators of the pension fund are unlikely to be able to put any sharing of the pension into effect. In addition, any agreement not approved by the court will be likely to enforce against your spouse in et event that he or she becomes uncooperative in the future.