How divorces are resting on who gets the pension

As more people over 50 are divorcing, pensions are replacing property as the main disputed assets in financial settlements, writes Jeff Salway

IT’S the busiest time of year for divorce solicitors – and pensions are at the centre of it like never before as the average age of divorcing couples continues to rise.

Divorce numbers fell slightly in Scotland in 2010, with some experts claiming unhappy couples were staying together for financial reasons. But the latest government figures show that divorce is again rising in England and Wales and anecdotal evidence from solicitors north of the Border suggests that the rate here is also on the up.

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The rate of divorce is increasing even as fewer people get married. But the biggest trend is among couples between 50 and 59, among whom divorce levels are rising most rapidly, according to Fiona Tait, business development manager at Scottish Life.

She pointed out that, according to the most recent figures from the General Register Office for Scotland, the rate of divorce has fallen in all the age groups below 45 and risen in all the age groups above it.

“Most startlingly, in the age group 55-59 the rate, although not yet large in itself, has increased by 77 per cent since 2000, and by over 70 per cent in the 60+ group. This of course has consequences for the divorce process itself, particularly the financial settlement,” she said.

But it means that more than ever before, the issue of pensions is at the heart of many divorce settlements. Many couples divorcing at an age at which they’ve accrued significant retirement savings are finding when it comes to thrashing out a settlement that their biggest asset is their pension, not their property.

The recent decline in pension values has diminished those assets to some extent, but failure to understand how much pension savings are worth can cost some people dearly at divorce.

One common problem is that on divorce, many women fail to claim their rights to their husband’s pensions, often opting instead to take the family home. Yet over time the funding needed for a decent retirement can easily outstrip the financial benefits of retaining the family home.

“By this stage in their lives some may well have built up considerable pension assets; equally, those that haven’t have very little time left to do so,” said Tait.

“So on the one hand it is essential to correctly identify and value all the pension assets that exist, and on the other it is necessary to ensure that a spouse who has no pension of his/her own should consider asking for a court order allowing them to share in their ex-spouse’s pension arrangement(s).”

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Lucy Metcalf, family law senior associate at Tods Murray, alluded to the same issue.

“There can be a variety of financial disputes depending on circumstances, but more often than not, it can come down to the wife wanting to keep more than half of the matrimonial property, in order to keep the house,” she said.

“It may be that the children are still living there or away at university, but she still wants them to return to the family home, which is why she’ll set her sights on it.”

Ideally a divorce settlement will give both parties sufficient income in retirement. But in cases where the two parties and the solicitor fail to grasp the complexity of pensions, there lies potential for unbalanced agreements.

There are three basic stages in determining what happens to pensions in a divorce settlement – tracking them down, working out their value and then deciding what to do with them.For women who have spent their married lives bringing up the family, divorce after 50 or so can mean that they have little or no pension assets and no time to build any up.

New laws introduced last April gave women the opportunity to boost their pension entitlement by reducing the years of national insurance contributions needed to qualify for a full state pension, from 39 to 30. Women will also be working longer soon, with the retirement age being raised over the coming years.

But the gap between the pensions on which women retire and those enjoyed by men had widened in recent years. The average woman retiring last year was expected to receive almost £7,500 a year less in retirement than her male counterpart, according to Prudential.

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Alison Fleming, head of pensions at PwC Scotland, said: “The main issue is often that the man tends to have a far higher pension entitlement than his spouse. Normally a female gets other assets to compensate for that, or a pension sharing order.”

A share of the pension may not seem so appealing – especially when compared with a cash settlement – but it may be the only way for the spouse to create a decent pension of her own, particularly if she hasn’t worked for some time, according to Tait.

“Many women in their 50s will have taken a career break to raise children and therefore are likely to obtain lower paid work with a correspondingly lower pension, if any. Unless they obtain a share of their spouse’s pension they will be facing a future which is dependent on state benefits and/or maintenance.”

There are three main ways of dealing with the split of the pension assets, once the valuation has been set.

Increasingly common are pension sharing orders, which came into force with the Welfare Reform and Pensions Act 1999. These allow courts to divide the pension into two pots, with a percentage of the main pension transferred to a pension scheme in the name of the spouse. The split is rarely 50/50 as it depends largely on the other assets being divided up between the two parties.

Another way of doing it is “earmarking”, where the agreement sets out the proportion of the pot that the spouse will get at the retirement of the pension scheme member. However, this can be affected by early retirement or the death of the main pension holder, leaving the spouse out of pocket.

Then there’s offsetting, where the value of the pension is balanced against another asset. For example, the wife keeps the marital home and the husband retains his full pension rights.

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Metcalf, at Tods Murray, said: “Often, the wife wants to offset the value of the husband’s pension against other assets, such as the house, as that might mean that she can structure the settlement so that she gets to keep the house. However, other options, such as splitting the pension so that the wife has her own pension when she reached retirement age are always worth considering.”

But even after that there can be issues over the value of the fund, said Fleming. “Assets are valued at the start of proceedings but when it comes to actually dividing up the pension its value could have changed, particularly in recent years. It is important that pensions are considered so that ideally each party has an income of their own upon retirement.”