We all know that divorce is sadly part of modern life. Although the overall trend recently has been a reduction since a high in 2003-2004, just over 40% of marriages still break down, according to the Office for National Statistics’ (ONS) 2016 figures. But what are the financial consequences of this for the couple, and in particular what is happening in relation to their pensions?
Research conducted on behalf of Scottish Widows for their 2017 Annual women and retirement report, published in November 2017, reveals some worrying statistics suggesting that, almost two decades on from the introduction of pension sharing, the importance of pensions in divorce cases is still being overlooked or underestimated.
I believe there are three main reasons for pension sharing orders not being made. First, lack of understanding. Secondly, lack of advice. Thirdly, the tension between immediate and future needs.
Pensions vary in complexity. Some are relatively straightforward whilst others, in particular unfunded public sector or other final salary schemes, can be more complicated. When a marriage breaks down the couple might not appreciate the importance of pensions and the need to take them into account as a key, and indeed perhaps the most valuable, asset on divorce.
Historically, when a couple split, this lack of understanding would have been addressed by them taking legal advice. However, in 2013 legal aid ceased to be available for advice and representation in the majority of private family cases. This means that many people are not able to get even limited professional guidance and support about their situation. Those who can afford it are understandably anxious to keep costs down and it can be difficult to encourage them to spend money on investigating pensions issues. If the case ends up in court, the problem can be compounded by a reluctance on the part of some judges to authorise expenditure on independent expert evidence.
Even where pensions are taken into account, the priority will often be for the bird in the hand of money now for housing or other day to day costs rather than the two in the bush of pension benefits that cannot be accessed for many years to come. One person may therefore get more of the cash with the other keeping the pension. This is known as offsetting and will be the explanation for many of the cases where a pension sharing order is not made.
It is essential when considering the division of pensions on a divorce to see advice from legal and financial professionals as an investment worth making. Failure to give proper regard to pensions is a ticking time bomb and anything employers can do to help their employees appreciate the issues will prove invaluable.
Nigel Shepherd is the national head of family law at law firm Mills and Reeve