Partner
Stowe Family Law
There are so many things to consider if you are going through a divorce, it can often seem totally overwhelming and it is hard to visualise what a future outside of the process could look like. When it comes to finances, this can be even more stressful. In a lot of relationships, one partner takes control of the money – they understand the incomings and outgoings, what’s needed in terms of paying the necessities and what’s then left over. For the other partner, suddenly needing to understand the full financial landscape and plan for the future is a frightening prospect.
For women especially, this can mean that often hugely important financial matters are overlooked, which can leave people vulnerable after divorce. One area that is often not considered in divorce proceedings is pensions. The impact of the gender pensions gap means that women can be left struggling in retirement, even without adding divorce into the mix. But when these factors are combined, there can be considerable risk in not acknowledging pensions as a key part of a financial settlement. There are ways and means to ensure that this does not happen, and much of it comes down to asking the right questions and understanding what you are entitled to.
What is the Gender Pensions Gap?
Most people will have heard of the Gender Pay Gap – the difference in salary between men and women doing the same job. The Gender Pensions Gap is very similar but focuses on the amount of money in a retirement pot at the time an individual leaves work. It is estimated that there is a 56% difference in the average pension assets held by men and women when they reach retirement age.
Women tend to (although not always) have smaller pensions because they have taken on lower wage jobs or have been victims of the Gender Pay Gap) or have contributed less overall to their pot due to part time working or time out of the workforce to raise children. Women also have a longer life expectancy than men, meaning that they need more capital in retirement to produce the same annual income.
What is the impact of divorce on the Gender Pensions Gap?
According to new research released by the Pension Policy Institute (PPI) and now:pensions, divorced women typically have around £53,000 less in their pension savings compared to divorced men in the UK. A divorced woman’s annual pension income, the research states, is £13,893, only just over the minimum required for retirement living standards.
Some of this is because lots divorce financial settlements, and mostly those done without the input of a specialist lawyer, do not consider pension assets. It’s very common for people to believe that pensions are a sole asset – that they are owned by the person who’s name they are in. It is very normal to think like this, so common in fact that at least 60% of women don’t discuss pension assets during divorce, mainly because they did not know that they should. Something in your partner’s name, particularly something as untouchable as a pension seems like an asset that is not to be shared and you’ll each get what you have on retirement based on the work you did over your lifetime. Others feel that they are not interested in pensions, as it is something that isn’t tangible to them now, often being some years away from retirement.
If you think about it differently, in a marriage, each person’s individual income goes towards supporting the family, the house and your lifestyle. You might contribute a smaller percentage of the total if you are the lower earner, but you still contribute. A pension is the same, but it just gets tucked away for years until you are ready to leave work.
In reality, pensions are often the second largest asset a couple has together, after the family home. And they should be considered in divorce. This does not always mean everything is shared directly down the middle, but you need to understand the full landscape, so you know what is available for division, and what you both need moving forwards post-divorce.
How do pensions work in divorce?
There are three ways pensions can be included in a divorce financial settlement, although two are more popular. It is important that you seek expert family law advice to work out which option will be best for you and will support your future goals. If you have a defined benefit scheme or another complicated pension, this advice will be even more important.
The first way is through pension sharing and made legally enforceable by a Pension Sharing Order which forms part of your financial settlement. Pension sharing is where one person shares a percentage of their pension with the other, and the share is transferred into the recipient’s sole name. It can be kept in the existing scheme or transferred into an alternative fund.
Secondly: pension offsetting. This is where the value of the pension is matched by another asset, for example a greater portion of the family home. The pension is not shared but the other person gets more of another asset to compensate. This is often a popular choice for women especially where they wish to retain the family home.
Finally, is a Pension Attachment Order, also called earmarking. These are decreasing in popularity because what they essentially do is maintain your ties to your ex-partner until you retire. The pension portion is only given over once it is in payment and comes to the recipient in a lump sum or regular maintenance payments.
What can you do to minimise the risk?
Understanding that pensions should be considered in divorce is important. They may not be included in a final settlement, usually if the marriage has been short or if you and your ex are still young and do not have considerable pension savings already, but you should make sure you know the lay of the land. It is difficult to get out of the mindset that pensions cannot be shared, but you should absolutely ask the question.
Make sure you know what you have in your own pot, and ensure your ex declares theirs as well. There are ways of ensuring this happens through the process of financial disclosure and filling in the Form E.
In the marathon of divorce, it can be difficult to see beyond the finish line. You just want to get it over with and move on. However, spending that little bit of extra time making sure everything is in order, and thinking ahead, can reap the rewards in the future.