Why your clients are losing a share of £4 billion a year by not splitting pension assets on divorce

Last month, Sacha Baron-Cohen and actress Isla Fisher became the latest celebrity couple to announce their separation, after 14 years of marriage.

While your clients may not share the same level of wealth as this particular Hollywood couple, it’s likely many will find the financial aspects of their separation both stressful and contentious.

You’ve previously read about five important reasons your clients may benefit from financial advice when they divorce – and a new report has highlighted the issue that was top of our list: the division of pension assets.

Read on to find out more about how divorcees are giving up a staggering £4 billion a year by not considering a fair split of pension assets when they separate.

Many spouses simply don’t know about their partner’s pension, or that they can be included

Many financial settlements conclude without pension sharing simply because either a spouse doesn’t know that such a scheme existed, or because they didn’t realise a pension could be divided.

Indeed, the Standard reports that a quarter of women did not know whether their spouse had a private pension, and 77% did not know the value of it. Moreover, 28% did not know that they should even form part of the discussion.

Figures recently released by the Institute and Faculty of Actuaries (IFoA) and Scottish Widows, reported by the Standard, have revealed that only 30% of divorcing couples include pensions in their divorce settlements.

Consequently, the calculations undertaken by the IFoA reveal that between £2 billion and £4 billion of pension savings are missed out on every year.

When it comes to divorce, pensions are overlooked in 70% of cases, whether it’s a lack of understanding or because they are simply not considered to be a marital asset.

However, the court considers pensions as an asset capable of division in much the same way as property or savings and investments.

A spokesperson for The Law Society told FTAdviser that pensions were seen as too complicated and women often preferred to settle in favour of assets such as the family home – an approach commonly known as “offsetting”.

They added: “I have sat down with clients and pleaded with them to consider looking at their spouse’s pension. In one case I managed to persuade a woman who was going to settle for the family home – which was worth around £200,000, to consider a pensions splitting order.

“So, we managed to go for a pension splitting order with her husband, a mid-level civil servant, who had saved over £1 million in his pension during their 20-year plus marriage.”

The problems with offsetting

In many cases, the issue of pensions isn’t dealt with through a Pension Sharing Order, but through offsetting.

Often, one party will retain the family home in lieu of any claim on their ex-spouse’s pension. In simple terms, if a property is worth £500,000 and a pension is worth £500,000, one party will take the property and one the pension.

Anecdotally, it is more common for a wife to elect to do this rather than a husband. In many cases they are likely to be the primary carer of the children and want to retain the family home for their stability and security.

Some clients also believe that seeking a division of pension assets will mean the couple remain financially linked (as would be the case, for example, by using an earmarking order). Many don’t realise that a Pension Sharing Order can represent a clean break as part of the pension holder’s fund is transferred into the recipient’s own scheme.

There are several issues to consider when adopting an offsetting approach:

  • The client who accepts the “other” assets may have a significant income shortfall in retirement.
  • The costs associated with maintaining a property can be significantly higher than investing in a pension.
  • The party taking the property might have insufficient income to run it.
  • The cash equivalent values of different pension schemes may not be comparable, leading to inequity between parties.
  • Receiving capital now, rather than a pension share in the future, might be more valuable in the short term (this is often dealt with through a “utility discount”).
  • Pensions are subject to tax, so the party retaining the pension may have to pay tax when withdrawing a lump sum from the pension fund or when drawing a regular income.

Overall, the greatest risk is that the receiving party’s wish or desire to retain the family home overrides any considerations about their future income or wealth.

Financial planning can help clients to make informed decisions

Understanding how the decisions they make now might affect their long-term financial security should be a key priority for clients.

As Pension on Divorce Experts (PODEs), we work with individuals to establish what a “fair” split of pensions looks like.

One way we do this is by using cashflow modelling. Using sophisticated software, we can show how taking more capital upfront can result in a party being comparatively worse off in the medium to longer term.

This can help your client to make a more informed decision about whether to seek a Pension Sharing Order.

Additionally, if a client is set to receive a pension share, we can help them to set up an arrangement to accept such a payment and provide advice on how to invest these funds.

Get in touch

If you have any divorcing clients who would benefit from expert advice, we would love to help. Email info@blueskyifas.co.uk or call us on 0118 987 6655.