When your clients come to divorce, dividing their assets is likely to be one of the most important – and emotive – parts of the process.
While “who gets the family home?” will likely be near the top of any list of priorities, splitting pensions tends to come a lot further down. Indeed, many couples don’t even talk about their pension wealth when they separate.
Research recently published in the Times reveals the worrying statistic that fewer than 1 in 7 couples who divorce will split their pension savings.
Read on to find out more about why so few couples are sharing their pensions, why it matters, and how BlueSKY can help.
Pensions form a greater proportion of UK wealth than property
Research published in the Times reveals that just 80,290 of the 602,491 divorces that were settled in court between 2016 and September 2021 included any orders to share retirement savings fairly.
Meanwhile, the data revealed that couples ordered by a court to share assets in a particular way share pensions more often. Since 2016, about 40% of the couples who had to obtain a “financial remedy order” — where they cannot agree how to split their finances outside of court — ended up sharing a pension pot.
This is a real issue considering that the Telegraph reports that pensions form a greater share of UK wealth than property.
Pensions account for 40% of all wealth in the UK – around £7.1 trillion – while property (defined as its value minus mortgage debt) is worth £6.9 trillion, equal to 38%.
It’s likely that pensions will be one of, if not the, largest assets divorcing clients will hold, so failing to tackle the division of this wealth could leave one party substantially disadvantaged.
3 common ways to split pensions on divorce
At the present time, there are three common ways divorcing couples can share pensions.
Here, the pension benefits are split at the time of the divorce. We can obtain valuations of each client’s pension funds and create a Pension Sharing Report to enable clients to fairly divide their assets.
It is a clean break — the clients or the court decide how much of the pension should be shared — and a client can usually either start a new pension to accept the share, or have that share transferred into their existing pension.
Watch our informative guide to pension sharing and learn some useful tips.
This is where the spouse with the smaller pension receives some income or lump sums from their former spouse’s pension in the future.
One issue here is that the party receiving the pension from the other must wait for their ex-spouse to retire before receiving their share of the benefits. They also have no control over the pension.
This is where clients decide to offset the value of a pension against other assets. In simple terms, one spouse might take a £400,000 pension while the other may take a £400,000 property.
There are issues with this approach. Firstly, the party who accepts the property may have to sell it to generate an income in later life, and there may be costs for maintaining a property (unlike a pension, where fees are generally low).
The client with the pension also benefits from tax relief. As well as tax relief on pension contributions, a pension will typically fall outside a client’s estate for Inheritance Tax purposes, unlike a property.
Watch our useful pension offsetting webinar to learn more.
Failing to share pensions is a particular issue for women
If fewer than 1 in 7 divorcing clients are splitting pensions, this is likely to have a detrimental effect on your female clients.
A gender pensions gap already exists, mainly due to a combination of women typically earning less over their lifetime and taking time out to care for children. Failing to share pensions fairly on divorce exacerbates this issue.
You’ve previously read about research from The University of Manchester that revealed men have substantially more private pension wealth than women.
As an example, for those aged 65 to 69, median pension wealth for men is just over £212,000 compared to just £35,000 for women.
Get in touch
If you have clients going through a divorce, we can help. As Pension on Divorce Experts (PODEs) with 20 years’ experience in this area, we’re ideally placed to help your client with any pension issues they encounter during the divorce process.
Whether that is producing a Pension Sharing Report or providing tailored, individual pension advice we are here to support your clients at a difficult time.
To find out more, if you have clients that would benefit from high-quality advice, email firstname.lastname@example.org or call us on 0118 987 6655.