Don't take your pensions for granted
When a married or civil partnership couple separate, and particularly if they are trying to reach a deal between them without lawyers, financial focus is most commonly on what is to happen to the family home and any capital assets or liabilities. It is easy to fall into the trap of discussing what you can see, with less consideration given to what you cannot see but which may still be of substantial value. Pensions fall squarely into this category. They sound technical, are not always easily understood, and are not needed until retirement age, so why worry about them now?
By the way, this is a four-part series on DIY divorce, and pensions are part two. You can find the rest of the series via the following links below.
Part 1: Mortgages
Part 2: Pensions
Part 3: Remarriage
Part 4: Tax
Why a judge will never disregard pensions
If an acrimonious divorce case reaches a court, a judge deciding financial cases will never disregard pensions and it is worth understanding the principles behind this. Before final decisions are made about sharing assets, each of the couple will have been required to disclose the values of their pensions. The values required are known as cash equivalent transfer values (CETV), or, for pensions in payment, cash equivalent benefits (CEB). In simple terms, this is a figure that clarifies the value of the pension ‘pot’ in capital terms for each party. Pensions are assets that can and often should be shared in a divorce. Pensions are also the only type of asset that have had dedicated reports written about them to assist lawyers and the court in understanding the importance of pension sharing (take that, property!).
Where a couple have children, one half of the couple may have taken maternity or paternity leave more than once and often for sustained periods, which will have likely impacted on that individual’s ability to build their pension during this period. This can lead to disproportionate pension pots for each of the couple. In this respect, it is obvious that pension division can more evenly share what has been accrued by each by way of pension during the marriage. This is based on the simple premise that if it suited a couple for one to work and one to be a homemaker or work part-time, at the end of the marriage or civil partnership the disadvantaged person should be able to recover some of their ‘lost’ pension provision. But for the marriage and a family, they would have built up better pension provision. Even if a couple do not have children, if their marital arrangements suited them at the time, this should not be with prejudice to the lower earner at the end of the relationship.
The value in pensions is of course not just built up by an individual’s contributions. Workplace-based pension schemes can offer valuable contributions by an employer. Different types of pensions can also perform in different ways, with some sectors offering generous pension schemes or better gearing suited for maximising returns. This can often lead to pensions being very valuable assets, and it is not uncommon to see a couple’s aggregate pension pot matching or exceeding the equity in a family home. Despite this, in DIY divorces focus tends to remain on the family home and, in doing so, an additional, often generous, pot of money is being entirely missed.
Women are often disadvantaged
It is well-reported that women tend to be more disadvantaged where pensions are concerned, not least because they are more likely to absorb longer periods away from work on maternity leave, working part-time and caring for children. There is not always the opportunity, therefore, to accelerate their careers in the same way as their partner. In a divorce, women, particularly mothers, tend to focus on securing the family home for themselves and the children and can give less thought to their long-term financial future. While a home may appear to provide the obvious source of financial gain and security in the immediate aftermath of divorce, the lack of income upon retirement can come as a nasty shock and downsizing may not be sufficient to bridge the gap in income and outgoings. By contrast, a shared pension offers an enhanced pension pot that can provide the possibility of a lump sum to boost capital, and better income, at a much-needed time.
The trap of assuming the value of your pension pots
Couples managing their own divorces are far more likely to overlook the need to share pensions, or, may make an arbitrary arrangement that they may later find is unenforceable. Pensions often feel complicated, and because valuations are usually only provided annually by the schemes, up-to-date figures are not always to hand. For this reason, many couples discussing arrangements direct will often agree that they will each simply keep their own pensions. Broad assumptions are commonly and incorrectly made about pensions – one I often hear is ‘we have both had our pensions for the same length of time so they are probably similar in value’. This is a statement that can often be very wide of the mark. The length of time a pension has been held is very rarely the only factor that impacts on value. Experienced family lawyers can often predict with fearsome accuracy which pension schemes are likely to be valuable (more valuable than a client suspects) just from a job title and sector.
Family lawyers will explain to clients the various financial claims that exist and will stress-test present and future financial plans to ensure they are robust. Clients do not have to follow this advice, but being informed is already halfway to making a better decision. For clients who want to know more about pension sharing and are open to giving real thought to their longer-term financial futures, independent financial advisors are brought in to help with investment advice. For many clients, this can bring a marked improvement to what they thought their retirement looked like, and more fairly represents a sharing of marital assets.
