Pension funds have to be taken into account as part of the overall terms of a financial settlement within a divorce. They are often a very valuable asset and also a complicated one on numerous levels. In this blog post I explore with solicitor, collaborative lawyer and mediator Gemma Hope from Family Law Partners the difficulties that can arise in relation to dealing with pensions within a divorce financial settlement, both from a legal and emotional perspective.
First things first: pensions are subject to full disclosure and a starting point of equality
From your point of view Gemma, what’s the first thing separating couples need to think about in relation to pensions?
I would say that the first point to be aware of is that there is a duty for all separating spouses to provide each other with full financial disclosure, this includes details of any pension provisions.
The starting point when looking at the value of a pension is generally its Cash Equivalent Value (CEV). However, the CEV will not always reflect the true value of a pension fund. It is usually necessary to instruct a specialist financial adviser or actuary who is a Pension Expert on Divorce (PODE) to report on how the pensions should be dealt with within the terms of a divorce financial settlement.
When a couple get divorced, the aim of the court is to achieve a fair financial outcome. An equal division of assets has to be considered.
Sometimes a spouse may need a greater share of the capital value of a pension fund in order to achieve equality in terms of the retirement income that can be generated. In some circumstances a move away from equality can be justified.
Why are there such emotional triggers around pensions in divorce?
When it comes to looking at pensions, this duty of full disclosure and the starting point of equality can for many cause strong emotional triggers.
Kim, from your point of view as a Family Consultant and Financial Coach, why do you think that might be?
People often have very strong emotional attachments to their pensions. A pension is set up with the purpose of enabling a person to retire from their work with a regular income at some date in the future (this is not necessarily the case now, but more on that later).
They will have often started their pension with their first job and both they and their employers will have contributed on a monthly basis ever since. In some cases it is the thought of their pension building up that keeps them going in a job that they don’t necessarily like.
Some people have private pension arrangements, but the same principles apply; this too is a nest egg for the future.
Feeling like our dream or security is ‘taken away’
Almost as soon as a pension arrangement is set up we tend to begin to imagine a future retired life free from work pressures, an opportunity to pursue one’s leisure activities, travel the world, or otherwise make up for the frustrations and sacrifices of working life, pursue unsatisfied ambitions.
So, understandably, the thought of sharing a pension with a person they are separating from can really hurt, really hurt.
James said to me:
“I feel like I have been building up my pension for all of my life, this is my reward for going to work each day, that awful commute, getting up a 5.30am on those dark cold mornings. I can’t believe that my pension is now not all mine”
We talked about the fact that his soon to be ex-spouse has not had an opportunity to build her pension whilst she has taken time off to look after their children.
While James could rationally understand this, he felt that having to share his pension was like someone taking away something that was truly and intimately his.
Rachael, who has been working in the IT industry, has been paying into a private pension for 22 years. She is very concerned about the impact of the Covid-19 pandemic on her future pension income but is even more worried about her future now that she needs to share her pension with her soon to be ex-spouse.
In order to manage and rebuild what she has lost, Rachael has decided to revisit her spending plan. She has made adjustments to her spending, so that she can make additional contributions to her pension over the next 25 years.
She says she now thinks about her pension as a special savings pot and feels much more in control of her future.
The value of work vs a stay-at-home career in a divorce settlement
Gemma, in your experience, what is the court’s view of the value of the work of a stay-at-home carer, in relation to that of someone who goes out to work to financially support a family?
The court view these contributions, whether those are financial or from being a stay at home carer, as being on an equal footing. Essentially there is no discrimination between the respective roles of a breadwinner and homemaker.
It specifically states in legislation that one of the factors that the court is to have regard to is:
“…the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family.”
This therefore does have some bearing on how pensions are looked at, because as you mentioned above a spouse who has stayed at home for instance to look after the children, enabling the other spouse to build up their career (and pension fund), will often have done so at the expense of their own career and ability to build up a pension.
How is a pension split between a separating couple?
As you have highlighted Kim, the thought for many of sharing a pension with a person they are separating from can be really distressing.
However, I find sometimes this is in part is due to people thinking that when they retire they will have to at that stage start paying part of their pension fund to their ex-spouse.
This kind of arrangement though is quite rare these days.
There are other options. For instance there can be a Pension Sharing Order where, as part of the divorce financial settlement, a percentage of one spouses’ pension fund is transferred out into another fund held separately by the other spouse so there is no ongoing claim or ties over each other’s pension funds.
There is sometimes also the option of offsetting, so rather than a spouse have a share of a pension they receive a greater share of other assets instead.
Pension funds are complex, so it really is essential to instruct a PODE to advise on what the options are given the specific pension funds involved and the circumstances of the spouses so an informed decision can be made.
What about sharing of pre-marriage pensions?
Kim, do you find where pensions have been accrued before the marriage that can also trigger strong emotions?
Absolutely Gemma, this is an exceptionally tricky area, it is really hard for people to understand why they would need to share the part of their pension that was built before the marriage. They struggle to understand why it would have anything at all to do with their soon to be ex-spouse.
They see this portion of their pension as their own, recently one of my clients was very upset and said to his partner:
“I just can’t believe that you would dare to take this from me”.
I explain that if money is tight then all of the pensions have to be taken into account, but I understand if there is enough money then sometimes it is possible to ring fence the pension that is pre-marriage.
Considering both spouses’ needs
Gemma, are you able to explain to us why in some circumstances the sharing of the pre-marriage pension is necessary?
It is very fact specific but generally speaking where the pensions concerned represent the sole or main mechanism for meeting the post-retirement income needs of both spouses, and where the income produced by the pension funds after division falls short of producing a surplus over needs, then the court are unlikely to deem that the exclusion of any portion of the pension can be justified.
The Pension Advisory Group report points out that pensions should be treated no differently to other classes of assets when it comes to meeting needs – essentially if an asset is required to meet needs then its source and date of acquisition is secondary, potentially in some cases irrelevant.
The court can have resort to any assets, whenever acquired, in order to ensure that the spouses’ needs are appropriately met.
In cases where the spouses’ needs can be appropriately met, the exclusion of the pre-marital portion of the pension may be justified, and in such cases the court retains discretion as to what portion should be excluded.
When it comes to dealing with pensions within the terms of a divorce settlement there is no ‘one size fits all’ answer.
It may well be fair to base the settlement on providing the spouses with similar incomes in retirement, but in some circumstances this might not be fair depending on factors such as needs, contributions, health, ages, the length of the marriage or (in cases where there are surplus assets to needs) the non-matrimonial element of the asset.
4 Tips for managing your pensions in divorce
Kim, what top tips do you have to help people manage the emotions that can be triggered when dealing with pensions within a divorce settlement?
1) Talk to an expert
If you have concerns about sharing your pension do talk with someone about them, a family consultant, lawyer or pension expert. When difficult feelings get stored up they can leak out in a ways that are not helpful.
2) See things from your ex-partner’s side
It is normal to have strong feelings about sharing something you have worked hard for, but do try to think about it from your ex-partner’s perspective. For example, an ex-partner may have given up or decreased their opportunity to build a pension to bring up your children.
3) Talk to your ex-partner
Talk to your ex-partner about how you are feeling. You may find that he/she has a particular attachment or feel strongly about another element of your divorce settlement.
4) Start creating your future
Attitudes towards pensions are changing. We no longer all retire at a particular age, and we are being encouraged to think about our pensions in the same way that we think about our ISAs. Spend some time thinking about your future and the life you want to lead – it is all in the planning.
You may also be interested in:
- Creating a budget for life after separation or divorce: step by step guide
- Free Spending Plan worksheet
- Pensions, are you losing out? – Pension and divorce
- How Financial Coaching can support you before, during or after divorce
- Gemma Hope at Family Law Partners
If you feel you might need support with emotional or financial challenges around divorce, don’t hesitate to reach out to Kim Crewe:
By email: firstname.lastname@example.org
Call: 07711 102461