Retirement after divorce – are you saving enough?
For separating couples there are many financial considerations, but chief among these for many is what to do about inequality in pension provision.
For separating couples there are a great many financial considerations to take into account upon divorce, but chief among these for many is what to do about the inequality in pension provision between spouses.
Historically, many wives left a marriage with little or no pension provision, with the understandable intention during the marriage that their husband’s pension would provide an income in retirement for both of them. In recent years, as women’s wages have increased, this situation has slowly begun to change, but a significant imbalance often remains.
New research published by Scottish Widows has revealed that only 52% of women are saving adequately for their retirement. This is a vast improvement from 40% in 2013 and 50% in 2014, but still means that nearly half of all women do not have the necessary savings to produce the income that they expect in retirement. At the other end of the spectrum, 12% of women have no pension provision whatsoever, compared to 9% of men, while 25% of women age 30-49 are not regularly saving for their retirement compared to 15% of men.
The reasons for these differences are many and varied, but most family law solicitors will be very familiar with situations where wives have smaller pension funds as a result of them having a lower salary than their husband, or where they have taken time out of work, or worked part-time, to care for the parties’ children.
In financial remedy proceedings, the Court will look at the extent of the parties’ financial assets and divide them in accordance with what is considered fair. Pensions are part of this assessment and the starting principle is that any contributions made to pension funds during the marriage should be divided equally between the parties. This can be done with a Pension Sharing Order, which takes a percentage from the pension fund of the wealthier party and transfers it into a pension belonging to the less wealthy party. The two pensions then stand alone and the parties are free to deal with them as they see fit, completely independent of the other party.
Alternatively, one party can forego a share of the other’s pension in exchange for a greater proportion of the other assets, such as the family home. This has the advantage of providing security and a home for the person retaining the property, but does potentially leave them exposed to an income-poor retirement or a need to downsize at a later stage.
Whatever the preferred option is, it is important to take independent advice from an actuary or an IFA.
Post divorce, figures show that men tend to be better able to recoup losses to their pension funds following a Pension Sharing Order, and increase their funds pre-retirement, than women. Family law solicitors, with input from IFAs, can help women address these future issues on a divorce settlement too.
As the proportion of women who are adequately saving for their retirement is increasing, so too are the numbers of people opting to cohabit rather than get married. There are now 3.2 million cohabiting families in the UK, up from 1.5 million in 2005. These couples will have no claim on each others’ pensions whatsoever in the event that they separate and as such, there is no opportunity to address any imbalance in funds held by each party.
The issue of women putting aside suitable savings for their retirement in the future is therefore a crucial one, which the pensions industry and Government need to continually address.