This year marks the 25th anniversary of pension sharing orders in this country. While this date may not loom large in many calendars, this date marked a fundamental shift in family law. Unfortunately, despite their usefulness, pension orders have not become widespread.
A 2021 Manchester University report highlighted the difficulties pensions can cause as part of divorce proceedings, particularly for women in later life.
While accurate statistics are very hard to come by, it is estimated that at the absolute highest, pension sharing orders are used in only 12% of divorce cases. That figure is open to interpretation, and the reality may be that the number of pension sharing orders is significantly lower.
In practice, this can mean that a large proportion of women going through divorce may face financial hardship in retirement.
Many women sacrifice their careers to care for children. In fact, according to the Office for National Statistics, 1 in 4 mothers are not in work while men continue to work and contribute to their pensions. This dynamic can result in married men having better pension funds upon retirement. Better, it seems, than their unmarried peers.
The fund, however, is held in the husband’s name. And, while benefits may pass to a spouse or former spouse upon death, this is not the same as a pension sharing order.
The reluctance to engage in pension sharing is shocking, especially given the impact this will have in later life. Much of this lies in our inability to consider ourselves as a retiree, while we are in our 40’s or 50’s.
Additionally, in my experience, men often prioritise converting their pensions, after separation, whereas many women instead focus on securing a place to live. While this is understandable given the destabilising effect of a divorce, this short-term thinking can overlook the importance of long-term financial security and reflects the importance of receiving tailored legal advice.
Moreover, research suggests that up to 40% of women have historically lived in poverty during old age. Given the cost of living crisis and the financial pressure that we are all facing, it can be easy to take an eye off the ball – particularly during the high stress levels experienced during a divorce case.
In my view, however, this is a mistake. The process of obtaining a pension sharing order, whilst technical in nature, is one that you ignore at your peril.
Obtaining a pension sharing order is a technical process that should not be ignored. Expert advice from legal and financial professionals is crucial. A pound in a pension is not the same as a pound in a bank account or, for that matter, in a house. Actuarial principles apply, and whilst it is tempting to look at the assets in a like-for-like pound-for-pound way, that is misleading.
In most cases, this is simply incorrect. For many couples separating, a needs-based approach is in truth most appropriate.
As part of this process, pension reports may also prove to be vital – especially for final salary schemes where the valuation figure may underestimate the benefits. Pension reforms from 2015 enable pensions to be used with greater flexibility, and where appropriate, to use pension funds to draw down cash, for example, to meet housing needs.
While this may have shades of ‘robbing Peter to pay Paul’, it adds to the complexity of this area and means that there is no substitute for expert legal and financial advice before any agreement is made – let alone submitted to a court.
Jim Richards, Director and Head of Family at Lawrence Stephens
