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Why pensions can be overlooked on divorce or civil partnership dissolution — and why they shouldn’t be

It is important to obtain early expert advice to assess all options for a settlement, including pensions.

Together with property, pensions are one of the most valuable assets that you and your spouse will own. The Office of National Statistics reported in 2022 that 42% of the wealth held by households in Great Britain is held in pensions.

Yet every year reports are produced by pension providers illustrating a stark fact: women often underestimate the value of pensions, especially on relationship breakdown.

Research carried out by Scottish Widows a few years ago even revealed that many couples were more concerned about losing a pet than seeking a fair share of a pension.

So why do so many people walk away from their entitlement to share the other’s pension?

The value of a pension can often be overlooked because it’s something that you don’t see or think about very often, and because when you separate, a more pressing concern is having somewhere to live. Most people’s minds are on having a home and enough money now to run that home. Very few people are thinking about retirement income and pensions.

Some people also wrongly believe that they cannot share in pension assets because they are only realisable later in life.

Pensions are also perceived as being complicated. That can be off-putting in itself, but missing out the pension could lead to you receiving a very unfair divorce settlement.

Please note that this article relates to the law in England and Wales. A different legal regime exists in Scotland and pension shares are approached in a different way.

How are pensions treated when you divorce?

All of your pension funds will be valued, the same as any property, business and savings/investments.

The first stage of your divorce is computation and working out exactly what there is to be shared and divided.

Once that is known, the usual starting point is a 50/50% split of the assets between you. In practice this is rarely the outcome as the family court looks at many factors to see if 50% is fair and if it’s going to be meet your financial needs.

Pensions can be shared as part of a final settlement, or their value can be offset against the value of other assets such as property.

What is the value of our pensions?

All pensions have what is known as a cash equivalent value (CEV or CETV). This tells you what the fund is worth in cash terms. However, in many cases, that value is overly simplistic as it does not look at the benefits that are attached to different pension funds.

To find out the true value, your family solicitor will instruct an actuary who is qualified to compare and value different pension assets. They will explain the best way of sharing different pensions to ensure that you are not losing out.

What happens if my pension is a lot lower than my spouse’s?

It is rare that both parties to a marriage have a similar pension fund. There are many reasons why this may be the case.

  1. One of you has been the higher earner.
  2. One of you took a career break or time away to have children
  3. One of you just hadn’t paid into a pension.

If you are the party with the lower pension then it is likely you would be entitled to a share of your spouse’s pension to ‘top up’ what you have.

House or pension — is it really that simple?

Whilst it may be tempting to settle for keeping the family home when you divorce, and letting your spouse keep their pension, this could be a short term decision that causes longer term hardship.

It may sound like a straightforward approach that saves money and time, but it can be a decision that causes ‘pension poverty’ years down the line. House prices can go down, as quickly as they may go up, and they are expensive to run and maintain. It is often the case that the party who gives up their claim to a pension over estimates their ability to save for retirement.

There are other options which can be looked at, such as deferring the sale of the house you are in, should you wish to stay there with the children for example – which could be obtained together with a pension share.

What are the implications of underestimating the significance of a pension share?

Almost half of marriages unfortunately now end in divorce.

  • In 2021, there were 113,505 divorces granted in England and Wales.
  • Despite this, information obtained from a Freedom of Information request shows that the number of applications for pension sharing orders, which instruct pension providers to divide the value of a pension fund between parties, fell by 35 per cent since 2017, from 36,202 to 23,622 in 2021.

That means that only 1 in 5 divorcing couples considered steps to share pensions on divorce.

The tragic impact of this is that a significant number of divorced women (66% according to a recent Phoenix Life report) have to rely completely on state pension for income in retirement.

What steps should be taken?

Since the advent of no-fault divorce in 2022 the process for divorce is much more straightforward. However, as a result, some couples fail to appreciate that they still need to resolve financial issues and so dismiss the importance of taking expert legal help to assess all potential options. This may include a pension sharing order.

In summary, it is important to obtain early expert advice to assess all options for a settlement, including pensions.

For further information, visit our dedicated page on financial settlements on divorce.

You can also use our divorce settlement calculator to see the issues that you need to consider based on your situation.

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