Pension protection for women on divorce

When a couple who have been married or in a civil partnership separate, one of the issues that has to be resolved is the future of their respective finances.

The basic rule of equality as to sharing of financial resources on separation

As has been stated many times in these columns, the starting point is that unless there are good reasons to adopt a different approach, under the law in England and Wales, everything owned by the parties, either individually or jointly will be divided equally between the separating couple.

This rule applies equally to the value of the pension funds held by each person as it does to other financial assets.

Application of the equality rule in practice

A recent report concludes that couples over 50 typically have total pension provision between them of about £450,000. It would therefore be expected that men and women in this age group who are divorced, would each have pension funds valued at about £225,000 before either starts to draw down a pension income.

In fact, the same research reveals that the average value of the pensions held by men is £235,000 but for women, the average is only £131,000. It is very unlikely that this difference can be explained by a much greater drawdown by women than men from their pensions.

Explanation for the difference in pension values after divorce

There are several explanations as to why there would be such a difference in the value of the pension funds held by each of the separated parties, but the two main reasons are:

  • When a couple's finances are sorted out after a separation, all the assets (and liabilities) are taken into account including, of course, any pensions. In most cases, the equal 'sharing' of what is available does not involve a division of cash, but rather an attempt to match in value a number of assets which are then divided between the parties.

A common example of the way that this works in practice, particularly where there are few assets other than a house and a pension, is to attempt to match one asset (or set of assets) against another. The result, particularly where there are children and both parties prefer to see the children continue to live in what had previously been the family house, is for the house, formerly owned by the parties in their joint names, to be transferred into the sole name of the party who will be the primary carer of the children. The other party will then retain all or the majority of the pension funds, to balance against the value of the house.

The result of that exercise is often that the party who ceases to have any interest in the house, instead has a pension fund much in excess of the pension fund of the new sole house owner.

The theory behind any such agreement is very likely to have been that when the children grow up and leave home, the sole owner of the house will be able to downsize to smaller accommodation and boost the value of their pension funds from the excess available from the sale of the former family home.

  • When an adjustment such as the one in the example given above takes place, a valuation of the house and the pensions funds will (or should) have taken place. In this way it can be seen whether there is a gap between the value of the assets which are being received by each party and if so, whether that gap is acceptable.

The valuation of most houses is undertaken in a conventional and straightforward  manner. The property is compared to similar houses in the area, taking account of its location and condition etc.

The valuation of a pension is much more difficult. The usual approach is to assess what is known as the cash equivalent value (CEV). This is the value of the assets in the pension fund if converted into cash. However, that valuation takes no account of certain factors, such as, for example, that women having a life expectancy greater than that of men, in fact need a cash pension fund higher than men in order to provide an annual pension of the same figure (but over a longer period).

Dealing with pensions on separating

Pensions are a particularly complicated asset but one which has increasing importance in an age when more and more people are expected to provide for themselves in their retirement years and the need for a decent pension income is so much greater. If the right steps are not taken to protect the pension position at the time of separation and divorce, it can be very difficult to recover financially at a later date.

It is important for parties to understand that pensions cannot simply be treated as being 'like for like' with other assets when determining a fair financial outcome on divorce or dissolution. It may be that a pension and the specific benefits it may have are far more 'valuable' than other assets. Parties need to be fully aware of what they might be giving up in this respect.

Increasingly, on divorce, couples are attempting to resolve financial matters between themselves without professional advice. That is understandable from the point of view of saving cash at what is often a difficult time. However, it should be recognised that a failure to come to grips with a fair arrangement concerning pensions could prove a very costly mistake in the long run.

In all but the simplest of cases, professional legal and financial advice is essential.

If you or anyone you know, are affected by the issues raised above and would like more information or some preliminary, confidential advice, please contact one of our experienced experts in our family team by e-mail or telephone. 

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