Poverty in Retirement - why pensions are often the overlooked assets

Resolution recently reported that only 1 in 6 divorces contain any type of pension sharing; that translates to only 16.67% of divorces!

What that means is that if there are pension assets that are ignored one party can end up in poverty in retirement, and a standard of living is very different to what they were used to during their marriage.  More often than not this is wives, who have taken time out from work to have children, and their pensions are not nearly as high as their husband’s due to a contribution gap.

So what are the reasons for parties ignoring pension assets?

1. Cost – parties can be put off by the cost of pension sharing for both the pension sharing fee set by the pension provider and the fee for a PODE (a Pensions on Divorce Expert) which is split between the parties.

2. Favouring the now – Parties prioritise the present over the future and do not take financial advice on what their future will look like in retirement.

3. Comparisons – Parties compare a pound of capital with a pound of pension as if they are like for like but they are completely different assets and should be treated as such.

4. Sentimentality – One party may value retaining the family home above all else and chose to ignore pension sharing to their detriment.

5. Time – pension sharing does take time both to instruct a PODE and wait for the report and furthermore after the divorce when the pension provider has an implementation period.

6. DIY maintenance – occasionally parties try and maintain an ex-spouse themselves believing it to be the cheaper easier option. However, this type of agreement is not legally binding, is reliant on goodwill of the payer and could leave the payee vulnerable if the payer reneges on the agreement or dies.  Additionally, without a PODE’s input the parties cannot possibly know if what they have agreed is fair.

When considering how to approach pensions within divorce parties have three options:

1. Pension Sharing- This enables a pension pot to be split and shared. Pension sharing does not automatically mean an equal 50% division as it can be any percentage between 1% and 100%. If a pension sharing order is made, the receiving spouse will have their own new pension which will benefit them regardless of their spouse’s death or retirement date.

2. Pension Attachment – this is infrequently used after the introduction of pension sharing. The court can order the pension scheme to pay the receiving spouse on their spouse’s retirement a percentage of the pension lump sum and/or a percentage of the monthly pension. There are, however, several problems associated with pension attachment. In the event the paying spouse dies before retirement, the receiving spouse will receive no widow’s pension and the benefit of an attachment order will be lost unless it has been made against any death benefits.

3. Offsetting – the parties’ value the pensions involved and decide if the spouse without significant pensions should receive a balancing capital payment from another source, e.g. the family home. It is often the case that the value of the off-set is discounted to reflect various factors, for example, that payment is received immediately, that the payment will not be subject to taxation and that it is free of risk. It is only possible to proceed by way of off-setting where there is sufficient capital available.

Why should expert advice be taken?

1. There is often a low level of understanding when it comes to pensions and their value.   Offsetting is the most common type of method of settling financial remedies. More often than not one party will value the family home above all else, perhaps to their detriment overlook their spouses’ pension to retain the house.  Offsetting is definitely something financial advice should be taken on and PODE instructed.

2. There are two categories of pensions; defined contribution schemes (DC) and defined benefit schemes (DB). Where there is a sizeable DB scheme the cash equivalent transfer value is rarely accurate and parties should always obtain expert advice from a PODE.

2. The courts now have the benefit of The Guide to the Treatment of Pensions on Divorce published by the Pension Advisory Group (PAG). Courts are now more alert to the unfairness of not sharing pensions having taken on board the guidance. If there are high pension assets with no pension sharing the Courts are now more likely than ever raise objections.

Parties should be aware of the potential future income they may lose rather than just focus on the here and now to avoid discrimination.  If you would like advice with regard to your pension upon divorce, please do not hesitate to contact me to arrange a free initial consultation.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.