Pensions are also complicated, boring, and distant for those who are not imminently approaching retirement age. Many people fundamentally do not appreciate the true value of their pensions. That is particularly the case with valuable public sector schemes, as the headline figure for the value of those pensions used in divorce proceedings (known as the CE or cash equivalent) often does not accurately reflect what is likely to be received in retirement.
Pension sharing orders are therefore the exception rather than the rule on divorce. Financial orders of any kind are only made in around 1 in 3 divorces. Of those cases where financial orders are made, only around 12 per cent include pension sharing orders. With around 100,000 divorces of opposite-sex couples in the UK each year, this means only around 4,000 people benefit from a pension sharing order.
As a result, the dominant method of dealing with pensions is not by a pension sharing order, but by offsetting pension capital against present capital. This frequently involves a party retaining the family home instead of receiving a pension share.
It is far more common for a wife to elect to do this rather than a husband, not least because they are more likely to be the primary carer of the children and want to retain the home for their stability and security. Not only does this result in women trading a long-term guaranteed income for short-term stability, but the misleading capital values of defined benefit pension schemes mean many do so at a vast undervalue, potentially sacrificing the equivalent of a six-figure sum.
No-fault divorce
With the long-awaited arrival in April of this year of no-fault divorce, the process of ending a marriage has become simpler. That is to be welcomed. But with that comes a risk that divorcing spouses are less likely to take legal advice, meaning many wives may not know that pensions are to be considered an asset to which they have a claim. This can have disastrous consequences for women later in life.
A recent government briefing paper on the gender pensions gap highlighted this issue and proposes making consideration of pensions a compulsory part of divorce proceedings, irrespective as to whether a financial order has been applied for.
Given that significant changes have only just been made to the divorce process, it seems unlikely there will be the political appetite for the further legislation required for this change.
In the absence of further legislation, divorcing parties must ensure they educate themselves on their financial claims following divorce, and take advice – both legal and financial – to ensure they are considering not just their current financial position, but what the future will look like for them over the medium and long term.
