Don’t be divorced from reality over pensions

Women are still losing out because they fail to claim their share of their spouse’s savings in financial settlements, writes Jeff Salway

Divorce settlements are still putting women at risk of hardship in retirement as they continue to overlook the value of their spouse’s pension savings.

It’s the busiest time of year for divorce solicitors, who will face increasingly complex financial settlements after April’s pension reforms take effect.

And with the average age of divorcing couples in Scotland on the rise, according to government figures, the matter of pensions is at the heart of financial settlements more than ever before.

But experts warn that women in particular are losing out in divorces because they fail to claim their share of what is usually the biggest financial asset in a relationship – the highest earner’s pension.

That tends to be the male, who will typically retire with a pension pot around 27 per cent higher than the average female, who is paid less and is more likely to have taken a career break to raise children.

Women are working longer as the state pension age is increased, but the pensions gender gulf remains stubbornly wide.

That helps explain why a fifth of women in their fifties and sixties told a Scottish Widows survey last year that they expected to rely on their spouse’s pension for their retirement income.

Yet the same study found that 84 per cent of divorcing women fail to bring pensions into consideration when working out financial settlements.

Sarah Tory, financial adviser at Shepherd and Wedderburn Financial in Edinburgh, said: “Pensions are in most cases our biggest asset outside the family home.

“Someone who has been making pension provision for many years can have accumulated several tens if not hundreds of thousands of pounds in pension funds.”

This is often overlooked because it’s less tangible and immediate than property and cash savings, she believes.

There are three main ways of dealing with pension assets in Scottish divorce settlements.

Pension sharing orders are an increasingly common method, whereby courts split the main pension into two pots and award a monetary amount to the spouse.

“They then receive those funds as pension and take them to their own pension fund for investment,” said Tory. “This is a clean break and requires a court order. It also requires the receiving party to receive advice on what the most suitable pension and fund is.”

The most popular option previously was offsetting, which allows a spouse to take a larger share of another asset (such as the property) as compensation for leaving the pension. This entails the value of the pension being set against those other assets.

“The advantage for both parties is that this achieves a clean break and does not require a court order, but the disadvantage is that they are left without diverse assets,” said Tory.

“The party who kept the house may find that when they want to retire they have to downsize considerably to generate income and the pension owner may struggle to get on the property ladder with no liquid assets.”

Another arrangement is known as “earmarking”, a court order which sets out the proportion of the pension assigned to the spouse when the main pension holder retires. It’s less complicated than splitting the pension, but there are certain pitfalls. Having to wait until the spouse retires is a significant drawback, while the arrangement can also be undone by the early retirement or the premature death of the main pension holder

“Acrimonious splits can lead to the deliberate delaying of retirement or even a deliberate choice of poorly performing funds to reduce the other’s amount when it is eventually paid out,” according to Tory. “It also means that parties will have to be in some form of contact, albeit through a third party, when payments are to be made.”

The complexity of pension settlements in divorce is set to become even greater after April, when new rules will give people aged 55 or over much more freedom with their pension savings.

This is likely to trigger significant changes in the way pension entitlements are allocated in divorce cases, Tory predicts.

“Instead of a proportion of pension being awarded there could now be a cash award,” she pointed out, warning that this approach would create a host of new questions in divorce disputes.

“Is the recipient better off to receive cash or should they be looking to their longer-term future and not take the quick option, for example? Would it be better to award the split and then make the cash sale? And what about death benefits from the pension pots and inheritance tax consequences of receiving cash rather than pension?”

Divorce trends in Scotland may also add to the complexity of financial settlements, according to Judith Scott, director of forensic accounting with BDO.

Couples who had been married for at least ten years accounted for two-thirds of Scottish divorces in 2012/13, she pointed out, meaning substantial assets will have often been built up.

“These assets may not just be in property but could also be in business interests, pensions, investments and inheritance,” said Scott. “The value of these estates is likely to be considerably larger, and more complex, due to the length of the marriage relationship. There may, therefore, be a lot to sort through in order to determine how much is due to each partner in the relationship.”