Divorce Day: income and pension problems begin

Divorce specialists expect to be busy as troubled couples reach the end of the Christmas break.

A new survey today from L&G revealed that women’s income falls 33% after divorce, but by just 18% for men. The findings come on what is commonly the busiest day of the year for divorce enquiries.

Divorce was the second biggest cause of a derailment of retirement plans after personal illness last year, according to the latest interactive investor Great British Retirement Survey. 

The survey of 12,000 people found that 11% of those who said their retirements had suffered as a result of a ‘major life event’ cited the break-up of their marriage. Among other big events causing retirement plans to go wrong were personal illness (24%) and death of a partner (8%). 

Less than half (41%) of divorced respondents said they had discussed pensions when they got divorced, while 57% said they did not discuss pensions. Men (50%) were more likely to say they had discussed pensions than women (30%). Divorcing couples with children were also more likely to discuss pensions (45%). 

The worryingly high proportion of divorcing couples who do not discuss pensions comes despite efforts by the pensions and legal industry groups to improve awareness and advice in this area. The Nuffield Foundation published a Guide to the Treatment of Pensions on Divorce in July 2019. Meanwhile, there are plans to introduce a ‘Financial Initial Assessment Meeting’, to focus couples on the financial issues of divorce, such as pensions, that can have lasting impact on people’s lives long after a final court order.

interactive investor, the UK’s second biggest DIY investment platform has recommended that women increase their contributions to their own private pension provision throughout working life to avoid losing out should they end up facing divorce. In addition, we recommend the issuance of guidance ‘packs’ for divorcing couples, giving information on the value of pensions. 

Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “People are suffering financial hardship as a result of divorce that is avoidable with better guidance. The high proportion of people who do not discuss pensions during divorce proceedings is worrying. 

“Along with a family home, a pension is likely to be one of the biggest joint assets that a couple builds up during their life together.

“Despite the introduction of the Welfare Reform and Pensions Act 1999, which introduced the concept of pension sharing as a solution for a former spouse to share in the pension rights of their ex-partner, there remain countless examples of divorce settlements that leave one partner, usually the woman, worse off in retirement.

“This is partly down to lack of understanding of the value of a pension but also a lack of awareness of rights to a spouse’s pension on divorce, as well as greater emotional attachment to – and value placed on - the family home, rather than the pension.

“We often hear of cases where women choose the property and ‘let’ their husband keep the pension. This probably isn’t the most financially sound decision, particularly as not only do women not generally have the same level of private pension provision, a lack of qualifying years also means they are unlikely to have built up as much state pension entitlement as their husbands.

“It might be desirable to continue living in the family home for many good reasons, but women need an income to live off, too.

“Unfortunately, financial advice is not always taken at the same time as legal advice during divorce proceedings. Some people may consider it too expensive, on top of so many other expenses.

“It’s vital to talk about pension sharing as a couple if one of you takes time out of work and it’s also important to know how much your spouse’s pension is worth.” 

Unmarried couples face financial consequences from split, too

It is not just divorcing couples who face difficult financial outcomes from splitting up. Outcomes can sometimes be worse for those splitting without some of the legal protection afforded by marriage. 

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “There will have been plenty of splits resulting from pandemic-induced relationship strains. But unmarried couples do not have the same rights as married couples from a legal standpoint, so it is important that splitting couples are fully aware that the division of joint assets and financial support may be different from what they envisaged. It might be a simple case of deciding who’s going to get the HD TV and who gets to keep the silverware, but for those who have bought a home together or have had children, things won’t be as straightforward.

“Understanding the true financial implications of a split may not be immediately obvious and may take some time. A good starting point is making a list of what you own, outright, and joint possessions as well as debts you have. Some couples struggling to reaching an agreement on the division of assets could benefit from using impartial third party such as a mediator. The legal route is another option if all else fails – but this could prove costly.”

Addressing the pension knowledge gap at divorce

Family law experts are attempting to address the knowledge and advice gap during divorce by offering financial information assessment meetings. A new guide aimed at clients is also being developed by the industry.

Gemma Hope, a specialist family law solicitor and Director at Family Law Partners, says: “A common scenario is a lack of understanding around the value of a pension compared with a value of a property. You can’t compare them pound for pound.

“This is because there is a lack of understanding of the value of pensions in general, but also because there is an emotional side to decision-making during a divorce, and how assets are split.  

“In most cases a pension is considered a joint asset when working out the terms of a divorce financial settlement. That’s because the court views contributions, whether those are financial or from being a stay-at-home carer, as being on an equal footing. This is considered fair as a spouse who, for instance, has stayed at home to look after the children, enabling the other spouse to build up their career (and pension fund), will often have done so at the expense of their own career and ability to build up a pension.

“The cost of financial advice can also be a barrier. But it’s really important to get this right as once a final order is made, it’s unlikely that there can be any adjustments made to that.”

Three examples given by Family Law Partners show the benefit of getting financial/actuarial advice compared to what the outcome would have been for divorced women if the pensions had just been shared according to what appeared to be an equitable numeric split, and therefore why financial advice is so important in these cases.

Example 1 – Financial/actuarial advice showed that a division based on equalising the capital value of pension funds worth £579,000 would result in a significant difference between pension income positions on retirement (one spouse would have £17,000 per annum compared to the other having £11,000 per annum – a difference of £6,000 per annum).  

Example 2 – To equalise pension income financial/actuarial advice showed that a share of a pension fund equal to £494,000 was needed as opposed to a half share, which was £438,000 (a difference of £56,000), to generate the same income in retirement. 

Example 3 – Financial/actuarial advice valued the fund at £985,000 as opposed to the value provided by the pension scheme which was £847,000 (a difference of £138,000).