According to research by Age UK, up to one in three couples in the 55-70 age bracket has experienced divorce. Like marriage, divorce is a contract – but in finalising the financial settlement, pensions can often be overlooked. It’s easy to forget the value of – and joint contributions to – pensions and savings being built for the future. In the emotional turmoil of divorce, a couple can be tempted to finalise their settlement swiftly without fully considering the current and long-term value of all assets, especially pensions. In fact an alarming 70 per cent of couples fail to account for pensions when discussing divorce.
One explanation is likely that of immediate priorities; many people will be focused on maximizing any immediately available liquid funds to meet their, and often their children’s, current needs. Retirement and wealth planning can feel a more distant and less important priority.
Existing divorce rules can be little help and despite legislation, according to a recent article in the Actuarial Post, divorced women in particular still lag far behind their married counterparts when it comes to pensions. For example, in the UK, divorcing couples who settle out of court have little or no rights, including being informed of their spouse’s private pension value. Of course, it’s no surprise that factors other than pensions will be of most immediate concern when a separation occurs. Family issues, especially if children are involved, and decisions about the family home are likely to be the main focus. Yet a partner with a long service pension and final salary rights could find themselves in a much better financial position once the divorce has been finalised, unless this is taken into account. It is therefore crucial pensions are properly considered as part of a fair settlement.
Do note that rules are different and vary depending on the country where the divorce takes place, the marriage contract and where any pensions are held. Consequently, it is vital to seek proper advice from an expert.
The divorce penalty
Furthermore, divorced women in particular not only end up with less than half the property wealth of married couples, but less than a third of pension wealth. The average divorced woman over 50 has pension wealth of £131,000 (€ 152,000) compared with £454,000 (€527,000) for the average married couple (Source: Royal London).
An eye to the future
Statistically women live longer than men – so retirement is likely to last longer and needs appropriate funding. Having to take a step backwards at divorce is damaging to the prospects of a well-funded retirement. Depending on circumstances, it may also represent a setback that can never be overcome, with direct implications for quality of life, not only immediately but also later in retirement.
What’s it worth?
Even if a couple’s pension assets are properly identified ahead of the financial settlement, the challenge remains of how to accurately and fairly value and apportion them.
Any valuation must first be requested by the person or persons who initiated the pension scheme. It can then be a complex process: the rules differ according to pension type and in which country the pension is based. A couple may also have a number of pensions of differing kinds, so it’s vital that expert help is sought. In general it will be important to value the pension, usually by calculating the Cash Equivalent Transfer Value (CETV). The CETV is likely to be less than the full value of the fund as it takes various fees into account, but offers a good starting point. Expert advice will then be necessary to determine how best to allocate the ‘pot’ to each party to ensure there will be comparable benefits at retirement. Of course this process is not an exact science and will be reliant on how each party then chooses to invest their portion of the pension depending on their own needs and attitude to risk. However working through this process does then help the judge award a percentage of the pension fund to each party, rather than an amount which would vary depending on the value at the time of transfer.
An equitable sharing
Once a valuation has been made, the couple can agree on how to split the assets, seek more advice if needed, and then apply to court for relevant paperwork to settle things. Options might include a straightforward sharing of the assets, offsetting the pension value against other assets, or a deferred option in which a sum is paid when one or both ex-spouses retires.
Numerous factors can be taken into account when deciding on the settlement, including any age difference, whether one or both spouses have retired, whether there are children involved, and where the pension assets are based (laws differ in areas such as Scotland or overseas). Expert advice is essential to ensuring any complexities are successfully navigated.
In arriving at a financial settlement, advisers and couples must ensure that pension assets receive the same attention as other tangible household assets including the family home and other forms of savings and investment.
Contact us for advice on your personal circumstances.
Claire Wedlock, Pensions Specialist