The other day the insurance, savings and investments company Aviva published its Family Finances Report 2018, detailing ‘the hidden cost of divorce and separation’. The report was mentioned here, in this post. Amongst the numerous findings of the report were that 22 per cent of females and 15 per cent of males made no claim on their former partner’s pension when they divorced/separated, and said that it was not included as an asset in the settlement.
This finding comes just weeks after the investment and pension firm Scottish Widows reported that divorced women were missing out on as much as £5 billion in pensions every year.
Why is it that, some seventeen years after the courts were given the power to make orders dealing with pensions on divorce, so many spouses are still failing to make the pension claims that they are entitled to?
Before I answer that question, just a little history. Contrary to popular belief, the courts regularly dealt with pensions on divorce, long before they were given specific powers to make pension orders. Yes, pensions were ‘protected’ by being beyond the power of the court to deal with directly, but the court certainly took them into account in any settlement, usually by making an ‘offsetting’ order, whereby the pension-owning spouse kept their pension, but the other spouse received the lion’s share of other assets to compensate.
The problem, of course, is that there aren’t always sufficient other assets to make an offsetting arrangement work. Accordingly, in 2000 Parliament gave the courts power to make pension orders, in particular pension sharing orders, whereby a percentage of the pension-holder’s pension fund is transferred into a pension fund belonging to the receiving party.
One might have thought that that reform would have solved the issue of pensions on divorce, by ensuring that spouses always got a fair share of the pension ‘pot’ on divorce. Why, then, does this not happen in so many cases?
I think the first thing to note about pensions are that they are not ‘visible’ assets, certainly not if they are not yet in payment. Unlike cash savings, for example, you can’t get your hands directly on the pension fund. Accordingly if, for example, a spouse wants money to rehouse themselves, they will look at other assets, and ignore the pension.
The second thing is that many people have little perception of the value of pensions. They can, of course, be extremely valuable, usually only second in value to the matrimonial home, and sometimes even exceeding the value of the matrimonial home. The Scottish Widows report indicated that the average retirement fund for a married couple is as much as £132,000. If spouses realised the true value of their partners’ pensions, surely more claims would be made.
The third thing is that retirement can be seen as very remote. This is, after all, the reason why so many younger people fail to make proper provision for their own pensions. Many people take little or no interest in pensions until they find themselves approaching pension age.
The fourth reason why claims aren’t made, with absolutely no disrespect intended, could simply be ignorance of the law. In these post-legal aid days many divorcing spouses do not have access to legal advice, and do not understand or appreciate their rights. The irony about this, of course, is that the cost of legal advice will usually be absolutely insignificant when compared to the value of the potential benefits of a pension order, as I saw an actuary point out on Twitter.
Which brings me to my fifth reason: pensions, and dealing with them, can be complicated. It may be that some spouses are fully aware of their rights, but are simply not prepared to enter into the ‘pensions minefield’ without professional help.
My final reason why claims aren’t made (and there may well be others) is a different kind of ignorance: ignorance of the existence of a pension. Many spouses may simply not be aware that their partner has a pension, and the partner may be reluctant to disclose it. Again, this is where access to legal advice comes in: a solicitor will explain that no settlement should be agreed without full financial disclosure by both parties, and that the court can force such disclosure if it is not made voluntarily.
The moral of the story is clear: if you are getting divorced, then if you possibly can, take some legal advice on your pension entitlement. It may cost you money in the short term, but it may gain you a whole lot more in the long term.