The financial risk of DIY divorce
The first anniversary of no-fault divorce was on April 6th 2023, when separating couples became able to end their marriage without hurling allegations of adultery or unreasonable behaviour. This is a very welcome departure from an outmoded and destructive system that benefited no one.
The move to the simplified no-fault divorce approach and the improved efficiency of the online portal for applications have led to more people opting to make their divorce application themselves, rather than through lawyers. Again, this is as it should be, and making the system easier, fairer and more accessible is no small achievement.
However, that lack of legal advice may have come at a price. Parties who conduct their divorce without going through lawyers are also more likely to try to resolve financial matters in the same way. This rising trend of DIY divorce leads to concerns that many people are losing out financially, by failing to understand the complex landscape surrounding finances on divorce.
Particularly concerning is the reduction in the number of financial orders that include pension sharing orders. Whereas in 2017 33% of orders included a pension sharing order – one that transfers a percentage of one party’s pension to the other – by 2021 that had dropped to just 22%. This period coincides with the introduction of the online portal, which has made it easier for people to bypass lawyers when divorcing.
For many, pensions are not prioritised on divorce. Most family law practitioners will attest to the fact that, commonly, the priority of the primary carer or homemaker on divorce will be to retain the family home or the ability to rehouse themselves and their children to a reasonable standard.
As women are more likely to be the primary carer, this is more frequently a view adopted by wives than husbands. The gender pay gap means wives often have a lower mortgage capacity than husbands, which means they usually require more capital than husbands to purchase a property. This leads to women prioritising receipt of capital from the sale of the family home in a divorce. The quid pro quo for this is that claims on their husband’s pensions are either reduced or ignored altogether.
What is your pension worth?
Pensions on divorce are initially valued on the basis of their Cash Equivalent (CE) value. For a defined contributions scheme, such as a money purchase scheme, the CE will be broadly equivalent to the value of fund based on the contributions made by employee and employer, subject to any investment growth.
But for final salary and career average (defined benefit) schemes, the CE is calculated differently and effectively represents the cash that a fund would pay for a pension holder to exit the scheme. This can be wildly different to its actual value, and the impact of this is seen most clearly in the predicted income that would be received from the scheme. In most cases, where there are defined benefits and defined contributions schemes of the same value, the defined benefits scheme will pay far more income in retirement than the defined contributions scheme.
By treating pensions on the value of their CE, as many DIY divorcees may do, rather than considering their underlying value in light of the income they will produce, a non-pension holder may be foregoing a significant claim. The losing party will commonly be the woman who focuses on an immediate need to rehouse.
The gender pension gap
There already exists a significant pension gap – calculated at around 37.9% by trade union Prospect – and divorce tends to exacerbate this. A 2021 study by the University of Manchester looking at pension provision for divorcees aged 55-64 found that men had an average total private pension fund value of £100,000, while women had accrued just £19,000.
There is therefore a huge worry that many women are leaving themselves short in retirement as a result of decisions taken in their divorce. Opting for a DIY divorce may save money on lawyers’ fees, but it may be extremely expensive in the long run.
Previously published in FT Adviser