Pensions: the elephant in the room. Most of us know they exist, and that we probably have one. But they tend to be given a wide berth. They are seen to be boring, complicated, and best avoided.
When it comes to divorce, it is all too common that pensions are overlooked, whether by active choice because of a lack of understanding, or because they are simply not considered to be a marital asset. However, the family court considers pensions as an asset capable of division in much the same way as a property or the contents of a bank account.
Figures recently released by the Institute and Faculty of Actuaries (IFoA) and Scottish Widows have revealed that only 30% of divorcing couples include pensions in their divorce settlements, meaning between £2billion and £4billion per year in pension savings are missed out on.
Unfortunately, it is often the case that women end up far worse off by ignoring pensions, significantly underestimating how much their spouse’s pension is worth and what it could mean for them in the long run. A survey we conducted at Stowe Family Law revealed that a quarter of women did not know whether their spouse had a private pension, and 77% did not know the value of it.
60% of divorced women did not talk about pensions in their divorce, and almost 28% did not know that they should even form part of the discussion, according to Scottish Widows’ 2023 Women and Retirement Report.
The gender pensions gap is estimated to be more than twice the size of the gender pay gap. Figures from the National Retirement Forecast show that the gap in pension savings between men and women at retirement is 39% compared to the 14.3% gender pay gap. This derives from three main factors – women being more likely to be out of work or in part-time work due to caring responsibilities; the fact that women live longer meaning they need a greater value pension fund to produce the same income as men; and women being less likely to meet the income threshold for an auto-enrolment pension due to lower employment rates and a higher likelihood of working multiple part-time roles.
In many divorces, pensions are not dealt with by way of a pension sharing order but by an approach known as offsetting, where one of the parties will retain a greater share of another asset in lieu of a pension share. Commonly, this will involve a party retaining the family home instead of receiving any interest in their spouse’s pension. Anecdotally, 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.
Additionally, there is a mistaken belief that seeking a pension sharing order will mean the couple remain financially intertwined. This can lead to many couples who want a clean break actively avoiding pensions.
However, contrary to this belief, a pension sharing order allows a couple to achieve this clean break, as part of the pension-holder’s fund is transferred into the recipient’s sole name.
Not properly considering pensions could cost women up to £77,000 in today’s money upon retirement, according to Scottish Widows. That sum could be far greater if more generous defined benefit schemes – such as those for the police, armed forces and NHS – are involved.
The prospect of it being compulsory for the court to consider pensions in divorce proceedings, rather than just financial proceedings, has been mooted, including in a 2022 government briefing paper “The Gender Pension Gap”. However, this has not been acted upon and given that the direction of travel in the family justice system is to encourage less rather than more court intervention, it is hard to see this proposal become law.
With the advent of no-fault divorce and the perception that divorce has become easier as a result, there is a risk that divorcing spouses may consider that taking legal advice and dealing with complex and time-consuming matters such as pensions is not necessary, which can have disastrous consequences for women later in life.
Matthew Taylor is a Partner at Stowe Family Law
