Following the increasing number of 'DIY' divorces, Head of Sweeney Miller Law's Family Team, Rebecca Cresswell, explores what to look out for when splitting couples deal with their pensions.
First things first – what is your pension pot worth?
Most separating couples my team and I help are often unaware of the extent of their “pension pot”. Some of us cannot remember the pensions we have accumulated over the years. Unlike other countries, there is no simple search engine using your National Insurance number to see where your various pension funds are invested. There are helpful tools, such as the Government Pension Tracing Service, however, you will still need to carefully go through your paperwork and emails to fully investigate your past employment history and pension contributions. Whilst time consuming, this is an important exercise for anyone to undertake, not just separating couples. There are millions of pounds sitting in forgotten pension funds across the UK. This issue often only comes to light when couples separate and they have to trawl through the various documents they need to disclose as part of the financial settlement process.
Pension risks of ‘DIY’ divorces
The bigger concerns relate to separating couples who are now doing ‘DIY’ divorces. The Government have made it easier for couples to separate now there is a non-fault divorce ground – namely that the marriage has irretrievably broken down.
As a result of this recent change to the divorce process, an increasing number of separating couples do not realise that they may remain financially tied to their former spouse even after divorce. If you have not had a financial settlement approved by the Court in a sealed consent order, sometimes referred to as a ‘clean break’ order where the financial ties are severed, then your former spouse could make a claim against you and your assets in the future. There is no time limit on when a claim can be made against you.
Pension parity
The problem I see with many splitting couples is that they come to me saying that they have agreed they would never claim against their spouse’s pension as they “earned it”. Pensions are often valued equal to or more than the family home. There is still generally a gender pay gap where women are paid less than men. In turn, this entirely correlates with their pension contributions.
It has also generally been the case that women reduce their hours or become the main carer for the children of the marriage, some women give up their careers for a short time, or completely, to raise the children. While some women consider the opportunity to spend valuable time with the children to be a privilege, and possibly their partner has paid for their day to day needs during this time, this has a significant impact on their retirement funds. Ultimately, if pensions are not properly considered as part of the separation there is a real risk of retirement poverty.
Conversely, for those keen to quickly move on with their lives, it is important to ensure that there are no unexpected pension claims, months and possibly years, down the line, by which time their respective financial situations may well be significantly different, for example having a new family, new living arrangements, change in work circumstances etc. Understandably, both sides in the split need as much certainty as possible to enable them to plan for their futures.
Sharing pensions
There are three options to share a pension:
A Pension Sharing Order means a percentage of one person’s pension is transferred to the other. The transferee will own that amount and is not reliant on the transferor retiring.
Earmarking is where one person pays an income or lump sum to the other when they start taking their pension, however this is rarely used in practice as there are greater risks involved, such as a loss of pension if the transferor dies before retirement.
Pension offsetting is where one person keeps their pension in exchange for giving up another asset. Where there are enough assets, it may be entirely possible to not share the pension if that is the desired outcome, however this always depends on the individual circumstances of the case.
Looking at the ‘bigger picture’
At Sweeney Miller Law, we closely look at the splitting couple’s assets and advise on how to share them fairly, ensuring protection for future retirement. There is often some reluctance to talk about our future, understandable given that many of us don’t want to think about old age and retirement, but it is such an important consideration when separating.
Couples may think that a ‘DIY’ divorce is a practical solution to save on solicitors’ costs. However, worryingly, it has been reported that whilst the number of ‘DIY’ divorces are increasing, the number of Pension Sharing Orders are falling, suggesting a risk of future financial vulnerability in retirement.
Recognising the financial challenges separating couples face, we offer our clients low and transparent fixed fees to complete their divorce. In addition, we can advise properly on the financial settlement, leaving no ‘loose ends’. This means that our clients fully understand the importance of having a financial order, and also ensures that they achieve a fair settlement to protect their current and future needs.
Whilst the process has been simplified to enable ‘DIY’ divorces, we strongly urge separating couples to get specialist legal advice on the financial settlement side of the split. We offer a free 30-minute consultation to explore the options and to ensure that we are the right fit for our clients.
Expert team
The Sweeney Miller Law Family team has longstanding connections with financial, tax and pension experts who can advise on the valuation and division of assets, including pensions, following a split. Our large Conveyancing team can help with the sale or transfer of the family home. We also have an experienced Commercial team to help with any company interests on divorce. Our Estate Planning team can help create a new Will following divorce.