Pensions on Divorce - Part 1
When a marriage ends in divorce, one aspect of the financial arrangements which will have to be made between the parties is how the joint pension provision is to be shared.
This topic is likely to be of vital importance whatever the age of the parties, but particularly so now that there are many more people in or approaching the third age who are divorcing – the so-called “silver divorcers”.
Why are pensions so important?
Recent statistics reveal that from 2004-2014 there was a 46% rise in the number of those getting married over the age of 65. This increase reflects the fact that many of those marriages will be parties marrying for the second time. However, it is also true that with rising life expectancies and increasing good health, people are making such important life decisions at an age which would not have been the case in previous generations.
The reverse side of the coin is that, in the same period, there was also a significant increase in the divorce rate of people over the age of 65, a huge rise of 38% of women and 23% of men.
It is not only for older people that the value of their pension savings is so significant; it is true also for the younger generation. However, the nearer parties are to retirement when a divorce occurs, the more difficult it will be to replicate the retirement income which would have been available for the parties had they remained together.
Indeed, the retirement savings may well equal or be greater than any other single asset, or exceed the value of all other assets put together.
Therefore, it is important that the whole issue of pensions receives careful attention. This is particularly so for women who frequently have lower pension savings, often significantly lower, than those available to men.
As with all assets which have to be dealt with regarding divorce, the starting point is equality. Those advising the parties, usually their solicitors, will want to work out how a solution would appear in terms of overall fairness if everything available, including pensions, are shared equally. Consideration will then have to be given as to whether there are compelling reasons why the result demands a solution that gives one of the parties more than the other. That solution might be fair in a particular case, for example:
- one of the parties suffers from an incurable illness or is disabled and in need of care
- one party brought assets to the marriage which ought to be disregarded, for example in a very short marriage
- to enable one of the parties to purchase alternative accommodation
- in very rare cases, one of the parties has made a wholly exceptional and unexpected and unmatched financial contribution.
It is rare nowadays for the financial aspects of a divorce to be finalised without some
adjustment to the pensions owned by the parties. In fact, there is a rising trend for wives to look for a sharing of what is available in pensions. This is usually required because women often have smaller pensions than men, typically because they have lower paid work and/or have periods when they are not contributing to a pension while taking time away from work in order to concentrate on child care.
The result is that, in the absence of adjustment of the pension savings belonging to both parties to the marriage, the pension available to the woman is almost certain to be lower than that due to the man.
The best way to split pensions on divorce involves complicated and sometimes contentious calculations. For example, does “fairness” require that the “equal” sharing of the total of pensions should be of the capital value of those pensions at the time of the divorce or of the income that would be available to each party at their normal retirement age?
It is often necessary to obtain expert evidence on such matters from a pension's consultant or an actuary.
The methods of sharing the value of pensions
There are three ways in which pensions are normally dealt with as part of a divorce financial settlement. These are
- pension sharing
- pension earmarking
Each of these solutions has advantages and disadvantages and it is wise to seek advice from experienced practitioners before an agreement is reached. It should be emphasised that once a particular solution has been implemented, the changes to the pensions owned by the parties cannot be undone.
An explanation of the methods by which pensions can be shared between parties is available in part 2.