The majority of divorcees are overlooking pensions and it could leave them financially vulnerable
Going through a divorce is difficult. So, it’s not surprising that many couples are failing to consider their long-term future and whether they need to discuss splitting pensions. Overlooking pensions, which may be among your largest assets, could leave you financially vulnerable in the long term.
The law changed in 2000 to allow pensions to be shared in divorce. However, only around 1 in 8 couples are doing this two decades later, according to a Guardian report. While it’s common to share property wealth, savings, and other assets as part of divorce or dissolution proceedings, pensions are often missed. There are many reasons why couples may decide not to split pensions, but it can significantly reduce retirement income.
Women are losing out on £5 billion of assets each year
The gender wealth gap means that it’s often women who are affected by not considering pensions during the divorce process.
According to the Guardian, married men aged between 55 and 64 have more than three times the pension wealth of married women of the same age. Among the age group that is most likely to get divorced – those aged between 45 and 54 – the gap is smaller, but it could still harm long-term plans. Men in this age category have, on average, £86,000 in their pension, compared to £40,000 for women.
A Scottish Widows report estimated that women lose out on £5 billion of assets every year because divorcees are ignoring pension wealth.
The effect can be harmful at any stage of life, but it’s particularly so if you’re nearing retirement, as you have less time to make contributions and benefit from investment growth. Women nearing retirement are less likely to have built up pension wealth in their name than younger generations too. A fifth of women over 50 plan to rely on their partner’s income, and 40% of women over 55 don’t have any pension wealth.
While divorces later in life are less common, they do still happen. Every year up to 6,000 women aged over 60 gets divorced. For those relying on their partner’s pension wealth or who are planning to do so, it’s crucial that pensions are taken into consideration.
How to make pension part of a divorce process
One of the challenges of including a pension in the divorce process is understanding its value. It could be years before you’re able to access pension savings, so you may instead focus on assets that will provide security now, like property or cash savings. However, pensions can add far more value when you consider the long term.
You should ensure you have up-to-date values for pension and forecasts before you make decisions about how assets are distributed. When splitting pensions, there are three options for couples to consider:
- Pension sharing: With this option, pension assets are split immediately. One partner will be awarded a percentage of the other’s pensions, which can then be transferred into a pension in their own name. Pension sharing allows for a clean split and means both parties have control over their own pension provisions.
- Pension offsetting: Each party keeps their own pension assets in this option. However, the value of the pensions is considered when dividing the remaining assets. For instance, the person with the lower pension wealth may take property to offset this. This can be a simple way to divide assets, but may also mean one person is left with little or no provision for retirement.
- Pension earmarking orders: Also known as “pension attachment orders”, this means some of a partner’s income will be redirected to their ex-partner when the pension benefits are paid. It would mean a couple’s finances are still linked, so it doesn’t allow for a clean break. For example, there may be some uncertainty around when the payments will be paid as it will depend on when the pension holder retires.
If you’re getting divorced, it’s important to reassess your goals and financial plan. The break-up of a relationship can mean the lifestyle you want now is very different to your previous plans. Your income and expenses may also change, so it’s important to consider both the short- and long-term effects this could have. If you’d like to talk to a financial planner about your goals, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
Arrange a call back today
No obligation chat with an adviser