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Divorce - mind the pensions gap

Emma WatkinsMy son once declared “I’m never getting married!”  He went on to elaborate “If you were told that you had slightly better than a 1 in two chance of your parachute opening would you jump? No! So why would you choose to get married…”

To be fair, he can be a little overdramatic but currently 42% of marriages end in divorce; with 60% of marriages expected to end in divorce by their 20th wedding anniversary.  Shocking statistics but based on my own experience all too true.

Often in divorces, pensions are the second largest asset behind the matrimonial home. It is important, then, for both parties – and I hate to stereotype, but particularly the wife who will often have negligible or no pension of her own – to understand the real value of a pension and the options available on divorce.

An impartial onlooker would state that the overall aim in settling finances as part of a divorce should be to achieve fairness between the two parties.  But for anyone who has gone / going through a divorce this is very easy to say, but incredibly difficult in practice. “Fairness” can mean a wide range of outcomes depending on the individual circumstances.

I guess I was “lucky” in my own divorce.  On the basis we both worked full time for the majority of our time together and were worth similar amounts, we just kept our own pensions.  But that is not the case for many couples, particularly where a decision was taken by both parties for one (typically the wife) to stay at home and bring up the children or work part-time (and in doing so potentially slow down future career development and miss out on valuable pension contributions). These decisions are leading to a gender pension gap and divorce is exacerbating the situation…

Unfortunately, all too many women are not considering their spouse’s pension assets at divorce.  This could be down to a lack of legal advice or, where there is a legal adviser, they may shy away from the subject as they are not sufficiently clued up on the process. The industry is reacting to this and attempting to upskill lawyers in this area – but we still have a long way to go.

Even when the wife is aware of their spouse’s pension, many believe property has a greater value and opt for the family home. This is a particular challenge with defined benefit schemes, where the amount is defined as a pension on retirement rather than a lump sum.  To put this into context a defined benefit pension of say £5,000 a year could have a value equivalent to the average cost of a house in the UK (ie. c£227,000 in March 2019). What looks like a small amount is actually incredibly valuable!

But often it’s just too difficult a conversation at a highly emotionally charged time, perhaps when custody of the kids (or dog) is at stake and more important.  And from some of the comments I have read on-line there are still some very ignorant men and women (self-professed feminists) out there…and I quote: “Women have fought for equality, and many battles have been won, but divorcing women are still making out they are pathetic little Fifties housewives.” Really?!  Instead of criticising, we should recognise that pensions are extremely complex, a divorce the worst possible time to engage with them, and support women to make sure they get their fair share of the couple’s assets.

So what is my plea?  If you, a friend, or even a friend of a friend are going through a divorce tell them to ignore pensions at their peril.  Find out what they are worth and make sure that their full value is considered as part of the financial disclosure process. Talk to an experienced and qualified financial adviser and, if it can be afforded, seriously consider taking that value as a pension (pension sharing) versus offsetting the pension for a larger cash settlement upfront. We can and should do something about the pensions gap!

Emma Watkins, Director of Individual and Bulk Annuities and Product Owner of Annuities, Scottish Widows

Last updated 28/10/2019