Legal Features Writer
1:00 AM 10th February 2024
Why Pensions Should Not Be Disregarded In Divorce Settlements
Image by Robert Owen-Wahl from Pixabay
A recent study which found that just one firth of divorcing couples considered pensions when dividing their assets reinforces how their importance as a valuable asset in relationship breakdown remains overlooked.
Almost 30% of participants in the research from Legal & General said that they had actively waived their rights to the value of pensions, which can help to provide for separating parties in retirement.
As the second highest value asset in a divorce settlement after the family home, pensions often make up on average 42% of the household wealth.
They are vital in the financial disclosure process of divorce which entails producing a full statement of divorcing couples’ current earnings and assets. The disclosure includes full details of all pensions including state pensions, along with the value of each one.
The financial statement aims to ensure that detailed negotiations can take place and enable both ex-spouses receive a fair settlement which could include a division of the pension benefit fund.
Pension sharing, the most popular method of reaching a divorce settlement, enables a clean break between parties in respect of capital claims. In most cases the pension fund permits a transfer of a percentage of the pension to another pension provider.
Image by Gerd Altmann from Pixabay
The pension share is not compulsory. In some instances, a party may prefer to take a greater share of the family’s home or other capital, abandoning any claim against the other party’s pension.
It is important to assess how the parties’ finances will be in the years ahead to avoid any longer-term financial problems.
Some divorces may involve several pension arrangements so it is important to consider which ones should be shared - and to what extent. Expert advice from an Independent Pensions Adviser will help with this along with a valuation and projected future incomes.
The pension share may be internal (when the recipient becomes a separate member of the same pension scheme) or external, with funds being transferred out of the main scheme to a different pension provider. It must be invested in an existing or new arrangement of the receiving party and utmost care should be taken to obtain details of the cost of any transfer. The Court will look at the needs of the parties and what other assets are available for distribution.
Pensions can be a complex area in divorce, which is why This Pensions Advisory Group produced a Report in 2019 aiming to give clear guidance to individuals, lawyers, judges and courts on dealing with it.
While receiving widespread support which included leading Family Court judges, the reality is that pensions are considered in too few cases and are not properly understood.
A revised and updated second edition of the Report was published in January this year. The potential complexity of the wide-ranging issues involved is illustrated by the Report running to 192 pages!
Recent changes in divorce law have meant that the risk of pensions being ignored, resulting in future financial problems, has increased.
The newly introduced No-Fault Divorce process which enables people to apply for a divorce without using a lawyer is a welcome and long-overdue change.
We always recommend that couples in this situation seek expert advice from a lawyer regarding finances, and particularly pensions.
Doing so will avoid the risk of losing out on pension sharing provision that they should legally be entitled to - and have earned over the course of a long marriage.
Neil Dring is a senior family law specialist at Jones Myers. Neil has almost four decades of expertise in divorce and financial settlements arising from relationship breakdowns.