Pensions aren’t the most glamorous or exciting subject so you rarely hear about them in the media in the context of divorce, but for many couples, after their home, their pensions are likely to be the biggest matrimonial assets and it is essential to think about how they are dealt with upon divorce.
When you think about divorce, what springs to mind? Fights over children, squabbles over money? Not all divorcing couples have children but every single one will have to think about the financial implications of their divorce. And sadly, the financial outlook isn’t always bright after divorce.
UK insurance giant Prudential publishes an annual survey of the financial prospects of each year’s retirees and this year’s survey makes sobering reading for those in the midst of or considering a divorce. Apparently, people retiring this year who have been through a divorce will see retirement incomes of 16% less than their counterparts who remain married or never marry. In real terms that’s £3,000 per year. They’re also more likely to be going into retirement with debts (32%) than their happily married, or never married, counterparts (21%).
Stats from the Office for National Statistics show that the divorce rate is falling except for those aged 55 plus, that is, those most likely to be thinking about their retirement.
So, what can you do about your pension to protect it from the effects of divorce? And what happens to pensions on divorce anyway?
Many of our clients are shocked to learn that their pension is subject to division upon divorce. “I’ve built it up myself, from my own earnings, for my future many years from now” they tell us. That may be the case, but the starting point for divorce is that all your property – no matter when you acquired it, built it up or will realise it – is matrimonial property. A pension isn’t a liquid asset like cash in the bank or even a property that you can easily make liquid, so it has to be treated carefully and we often work with pension experts to make sure pensions are split fairly or protected upon divorce.
The real key to keeping your pension as healthy as possible is to avoid court proceedings altogether, if you can. We always emphasise the benefits of working things out as amicably as possible to avoid lengthy, time-consuming and expensive contested proceedings. If you reach an agreement between you as to how to split finances, it can be made into a binding court order for a few hundred pounds. If you can’t agree and you need the court to decide for you, proceedings can cost tens of thousands per person in legal costs. It doesn’t take a pensions expert to see that those legal costs are far better in your pension pot than in the pockets of a lawyer!
If you can’t avoid court, the key is to be pragmatic. The three-stage court process can be concluded at the first or middle stage if the parties can reach an agreement with one another, saving thousands in costs and months in time. However, even if things keep on going through the various stages, be realistic about what you want and pragmatic about how to achieve it. Do you want to ‘win’ now or do you want to secure your pension? It may be worth giving up your claim on a property to keep your pension intact – or that property may represent security now while a pension does not. Think about what you want now and in the future, because while proceedings take many, many months, they don’t take quite as long as your retirement will.
If you’re taking legal advice, think about some financial advice too. Solicitors, although we know a lot about pensions, can’t give financial advice to clients. It may be that you’re not on the best type of pension for your lifestyle or you’ve just gone along with the same scheme as your husband or wife and could be on one more beneficial for you. Going through a divorce means you have a lot on your plate and making more changes is likely to be the last thing you think about, but a couple of hours with a financial advisor could be the best investment you can make.
We can’t take you through what happens to pensions in a divorce in detail, firstly because every couple has a unique financial situation and unique needs, and secondly because there simply isn’t time: the law in this area is extensive. The key message, however, is to remember that your pension can be affected by marriage breakdown and you need to think carefully about how to proceed so you don’t leave your future self thousands of pounds short each year.