Pensions have become an increasingly talked-about topic between divorce lawyers in recent years, after historically being overlooked during the division of marital finances and assets.
A pension pot blurs the line between the two: it is a financial asset, money held in the form of stocks, shares, bonds and other investments, with the aim to provide a retirement income for the pensioner.
But during divorce, the spouse with the smaller private pension pot may reasonably be entitled to claim a share of their former partner's pension savings.
This is not gender-specific; however, historically, it is normally the husband who has the larger pension, perhaps due to workplace contributions, and so in most cases it is the wife who has the right to claim a share of the pension pot on divorce.
Scale of the problem
According to Scottish Widows, the divorce pensions gap amounts to billions of pounds, and puts women in particular at a significant disadvantage during divorce.
Managing director Jackie Leiper said:
- Pensions are the second-biggest asset in most divorces.
- Pensions are ignored in 7 out of 10 divorces.
- The total impact is £5 billion per year in the UK.
Jackie added: "As the divorce rate in England and Wales reaches record levels, we're once again calling for pension assets to be automatically included in divorce proceedings.
"This would help ensure that relationship breakdown doesn't result in financial vulnerability for women later in life."
Why can a divorced wife claim her ex-husband's pension?
If handing over part of a pension seems unfair, consider the alternative scenario, in which the money was not invested into a private pension.
There are plenty of other ways the same funds could be spent, such as buying a house or car, paying off loans and mortgages, or putting it into savings and investments.
All of these represent marital finances and assets and would not be controversial as part of a divorce settlement, providing the income itself was generated after the original marriage took place.
Yet it is only relatively recently that good divorce solicitors have started to highlight the problem of divorced women reaching retirement without access to significant private pension savings.
How is a pension included in a divorce settlement?
It's usually not possible to liquidate pension savings as cash so that it can be paid over as part of a divorce financial settlement.
Because of this restriction, divorce lawyers have, over the years, developed three main alternatives to deal with pensions in divorce:
- Earmarking: An 'attachment order' is made against the pension so that when the pensioner starts claiming it, their ex-partner receives their share.
- Offsetting: The value of the pension is simply compensated using other finances or assets, to 'buy out' the ex-partner's share.
- Sharing: A percentage of the existing pension pot is transferred into the ex-partner's name, or they join the same pension scheme.
Pension sharing is the most direct way to divide a pension pot between the two separating partners, but it is subject to the rules of the relevant pension scheme.
How much of my partner's pension can I claim?
Pensions are treated similarly to other finances and assets, so although in principle you are entitled to half of your combined pension pot, the reality is less simple.
For example, your entitlement might depend on your financial contribution during your marriage, and any individual assets you hold outside of the marriage.
Valuing pensions can be difficult when they are held as stocks, shares and bonds, so Cash Equivalent Values will be used to estimate the size of the pension and include it in your overall marital estate.
Finally, if you have opted to split the pension via pension sharing, the court will award a Pension Sharing Order or PSO, which states how much each partner should receive.
If you feel like you have not received the full amount, speak to your divorce law solicitor, as there may be processes you can follow to have your pension settlement reassessed.
Can I lose this entitlement?
Historically, pension earmarking only applied unless/until the ex-wife remarried, at which point her retirement became the responsibility of her new husband and she lost any entitlement to the earmarked pension of her former spouse.
There are several clear problems with this approach, including the gender disparity, and the injustice of losing your previously legitimate pension entitlement just because you marry somebody else at a later date.
Alternative methods such as pension sharing and offsetting have helped to overcome the issues here, as they both represent a 'clean break' where neither spouse has any ongoing responsibility or reliance on the other.
However, if you opt for pension offsetting and receive cash or assets to 'buy out' your stake in the marital pension pot, you should make sure to have suitable savings in place for your own pension before you reach retirement age.