Today is Pension Awareness Day 2021.
Many people hear the word “pension” and go into shut-down mode:
“Yes, we know we need to think about pensions at some point, but it’ll all be ok, won’t it?”
“Pensions are all a bit complicated, and I’m too busy to think about them.”
“I don’t really understand finances”
“My other half deals with all the financial stuff”
Many people haven’t even discussed pensions with their partner or spouse, and have no idea how much each other’s pensions are worth.
The same goes for deciding what is going to happen to a couple’s pensions on separation. It all sounds a bit difficult – I’ve often been asked, “isn’t it easier just to ignore it and stick with what we each have?”.
If you are married and going through a separation, pensions are included in the financial pot to be divided between you. Pensions can often be one of the most valuable assets, sometimes worth even more than the family home. However they can all too easily be overlooked – there are so many things to think about when separating that pensions often fall to the bottom of the pile.
A couple’s pension assets in their respective names can often have strikingly different values. This could be because one of the couple is paying more in to their pension, or one may have been working part-time or may have taken time out of work to raise the children. It’s important that the overall pension pot as a whole is looked at and that parity in the parties’ pension positions is achieved where possible and appropriate.
Opening up the conversation about pensions, future-proofing and taking control of your finances is something I feel strongly about as a family lawyer – whatever your age, gender or relationship status. It’s all too easy to shy away from those difficult conversations and as a result pensions can end up being one of the tricky areas of discussion on separation too.
It’s important to note that pensions aren’t looked at if you are a separating cohabiting couple. If you aren’t married, this could mean you are in a vulnerable position, so it’s important to seek financial advice to plan properly for your retirement. If you are separating but not married, it’s still a good idea to seek legal advice so that you fully understand your rights and responsibilities on separation.
Where should I start?
If you find yourself, or a friend or family member facing a separation and you aren’t sure where to start with pensions, below are a few practical points to start thinking about and hopefully make this topic a little more transparent:
- Divorce proceedings must be underway for a pension to be shared – a financial order including a pension sharing order must be made – a pension provider cannot implement a pension share without this. This means that married couples who separate but don’t divorce can divide other assets but not a pension at the time of separation – this would have to be looked at as part of a future divorce – which could potentially leave one party in vulnerable regarding their future pension position.
- The starting point should be that all pensions are included for sharing, regardless of when they were accrued. Needs have to be met before ring-fencing can be considered.
- It’s not the case that pensions remain separate to everything else – I have lots of clients that come to me saying ‘oh that’s hers/his, they paid into it themselves and I’m not touching it’ but ignoring pensions can lead to unfair financial settlements and one party being in a worse position at the point of retirement.
- If you’re nearing retirement, the pension is in drawdown or teaching the maximum allowance, it’s important to get prompt and accurate advice as to the best way to approach sharing.
- Foreign pensions (eg QROPs) aren’t quite as straightforward, but it’s important they are disclosed, brought into the pot and expert advice sought- just because it’s held abroad doesn’t exclude it from being considered on divorce – so again, early advice is really important if one of you has offshore assets.
- A helpful starting point is to request the cash equivalent value of each of your pensions, for the purposes of divorce. Your pension provider should provide this free of charge once a year. There’s a special form (Form P) which should be completed and sent to the pension provider to get the level of information that is required as a good starting point.
- Advice from a pension expert on divorce (PODE) can be extremely helpful early on in discussions (and help to keep costs down in the long term).
- An actuary can be consulted to produce a pension sharing report to determine how pensions should be shared. It’s often not just a case of splitting the cash value in half – the court will usually want to see pension income on divorce being equalised. There are different types of pensions and some pensions have hidden benefits. Women’s longer life expectancy can have an impact on what is considered a fair split.
8. Some financial advisors can act as a financial neutral, which is beneficial where everyone is on the same page and some technical advice to ensure fairness.
- Yes, getting a pension report and involving experts can be expensive, but this cost is often quickly cancelled out by the benefit of getting the report – pensions can be really valuable and without a report and a fair pension share, one of you is likely to be missing out on a share of an important asset.
- If you aren’t on the same page where pension sharing is concerned, the court can order an actuary to produce an expert report and can then decide how a pension can be split.
I cannot stress the importance of getting advice – from a lawyer and a financial advisor to start off with – and getting this right. A good advisor can cut through the jargon and explain things to you clearly and logically, so that you are empowered to make the right choices and best decisions for your circumstances.
Please feel free to get in touch if you would like a clear, concise conversation specifically about your pensions on divorce, or any other aspect of your separation.