Dividing assets on divorce: pension pot of gold?
It may come as a surprise to some, but pension pots can often be one of the most valuable assets an individual owns, and increasingly may be so in the future given the introduction of workplace pensions. Many are unaware of the value of their pension funds or the benefits they will provide upon retirement, and such assets are sometimes overlooked.
When a married couple are looking to divorce, and to reach a consequential financial settlement, both parties must first disclose their financial position in full, providing details of all assets and liabilities, such as property, bank accounts, loans and pension funds, along with evidence of their income and outgoings. Where parties have pension funds, the values of these funds are relevant assets and should be taken into account when negotiating a financial settlement.
A common approach is for the parties to share in the pension assets equally, most frequently so that the income generated in retirement is equalised. In this scenario an expert pension actuary should be instructed to prepare a report dealing with the necessary calculations. Such a report can also deal with how pensions could be shared to generate different incomes for each party, to share the pensions based on capital, or to “offset” a share of a pension against other assets owed by the parties, such as property or investments. It could also deal with what is called “apportionment”, i.e. only sharing the part of the parties’ pensions built up during the time of their marriage.
Worryingly, those going through a divorce can sometimes fail to provide disclosure of their assets, including details of a pension, or alternatively pension assets are not included in the calculation for division, simply as they are deemed unimportant or irrelevant. When going through the extremely stressful and emotional process of a divorce, retirement often seems a long way off and planning for such time is rarely a priority. When a party has, for example, an immediate need to buy a property to live in, it is obvious that their priority may be to receive to cash to do so.
There are many divorcing parties who therefore appear not take pensions into account, and many of the resulting financial agreements could be unfair. The historic position was generally that the husband had a pension given that he went out to work, and the wife did not, as she brought up the family, and as such, women may be at a disadvantage in this scenario if pension funds are not shared. It is also demonstrated by the Office of National Statistics that women have smaller pension pots than men in general, possibly due to lower salaries and/or time out of their careers to have children. However, this is not just something that happened in the past; it continues to be a problem. Recent research by Legal and General found that women are more likely than men to waive their rights to a partner’s pension as part of a divorce (28% women; 19% of men).
How we can help
Regardless of who is disadvantaged, it is vital that both parties to a divorce take legal advice in relation to their position, and that pension assets are dealt with properly and fairly, a pension report being undertaken where appropriate. Where a party is without any pension provision at all and does not share in an ex-partner’s pension by way of a pension sharing order or otherwise, they could face significant financial difficulty when they come to retire, which could potentially be avoided. Taking early legal advice in relation to a divorce or separation is more likely to mean that the overall outcome is fair and equitable, and that the parties are best placed to move on with their lives.
The Family Team at Clarke Willmott LLP are experts in dealing with finances on divorce and separation. We deal with clients from all backgrounds, and have particular expertise in dealing with complex business, trust, pension and farming assets, high net worth cases and those with an international element. Please do get in touch to discuss any of the issues raised above, including how pensions can be dealt with on divorce.