It doesn’t matter if it was you or your spouse who said it. As soon as one of you says “I want a divorce”, your life is turned upside down. Emotionally and financially.
When the time comes to discuss the splitting of assets, very few people consider – or prioritise – pensions. They are, however, an incredibly important marital asset.
Sharing, offsetting and earmarking
While this blog focuses primarily on sharing, other options for pensions include offsetting or earmarking.
Where a pension is to be shared the Court will issue a pension sharing order (PSO). This order outlines exactly how much you and your ex-spouse will receive. The required payment is made at the time of your divorce, ensuring a clean break for you both.
Conversely, earmarking defers payment until pension benefits are drawn. Offsetting, on the other hand, means that one of you will keep all or a part of the pension, while the other will receive alternative assets deemed to have a similar value.
Why are women losing out?
Our experience – and the experiences of our colleagues and intermediaries – shows that women are often the ones who lose out when it comes to pension sharing on divorce.
“Before pension sharing was introduced in 2000, many women lost out simply because they could not share their husband’s pension,” Suzanne Todd, Partner and Regional Divisional Leader (Europe) of Withers Worldwide, told us.
However, even after sharing was introduced in England and Wales, “a lack of understanding of the complex issue of how to deal with pensions on divorce has meant that women have often lost out once more.”, Suzanne said.
This situation is not helped by the fact that many women are already at a disadvantage when it comes to pensions. Females are most likely to take career breaks to support their husbands, raise a family or act as a carer. This directly impacts the size of their pension. The gender pay gap can also impact retirement savings, giving women less money to set aside for their future.
In response, James Copson, a partner in the Withers Family team, has co-authored ‘A Guide to the Treatment of Pensions on Divorce.’ The publication provides easy to understand guidance and information for people divorcing and for practitioners. “We can only hope that this will be of real use to buck the unfair trend and encourage greater fairness in divorce awards,” Suzanne concludes.
Pension sharing on divorce “cuts both ways”
Today, a growing number of women are choosing to delay marriage and family to focus on their career. Traditional family dynamics are also changing; the number of females assuming the breadwinner role within their household has more than doubled between 1981 and 2018*. Women in these types of situations may have a very healthy pension pot, while their spouses “have not made adequate pension provisions.”
“As discussed with Mariella Frostrup in our Modern Relationships podcast series, some female clients are surprised to learn that on divorce that they are obliged to share their pension assets,” Suzanne reveals. “For separating married couples and civil partners, pension sharing cuts both ways.”
Her advice for women who are getting married? To ensure that you don’t lose out, “be clear about your legal position from the outset.”
Financial planning for divorce
Before agreeing a financial settlement, our Senior Client Director, Nick Toubkin, recommends having “total clarity on your investment plan and what the purpose of different investment portfolios is.” Understanding your overall financial position and the options available can help you safeguard your financial security after divorce.
“I work with clients to determine what their future financial landscape might look like,” Nick states. “I often use cashflow planning as a tool to help determine a new financial structure for them.” Investment consultation then provides them with a flexible and fully tailored solution for their future.
A new business and financial security
To help us better understand the role of financial planning and analysis in divorce, Nick shares one of his most recent experiences.
“I recently worked with a client to fully restructure her finances,” he begins. “This allowed her to understand exactly how much she could spend on an annual basis. It gave her the freedom to start her own small business to follow her passion of becoming a restaurant owner. We had identified some money that was surplus to her requirements.”
Implementing the recommendations that Nick had made would mean that, at the end of her lifetime, the client’s assets would amount to £4,650,000 rather than £3,250,000 (the value of her assets if she had done nothing). “She would also have avoided a lifetime allowance tax charge of £90,000 and we projected the level of prudent annual expenditure would increase by £15,000 per annum.”
Achieving financial clarity for divorce
To learn more about pensions sharing on divorce or to restructure and review your post-divorce finances, contact our friendly team and book an appointment with one of our advisers in London or Nice.
*The Rising Earning Power of Women, New York Life Investments, March 2020