When couples separate, the family home is often the first thing they think about. Who will stay there? Will it need to be sold? Can one person afford to keep it? Where will each person live afterwards? Those questions are understandably important. But there is another asset that can be just as significant, and sometimes even more valuable, which is often overlooked: pensions.
For many separating couples, particularly after a long marriage or civil partnership pensions can represent a substantial part of the overall family wealth. Yet because they do not feel as immediate or tangible as a house, savings account or investment, they can easily be pushed to one side.
That can have important long-term consequences.
On divorce or dissolution in England and Wales, pensions are considered alongside the other financial resources of the marriage or civil partnership, including property, savings, investments and income. The fact that a pension is in one person’s sole name does not necessarily mean that it should simply be left out of the financial settlement. The court has the power to make a pension sharing order, which can transfer a percentage of one person’s pension rights into a pension held for the other spouse/partner.
That does not mean pensions must always be divided. Every case is different. The important point is that pensions should be properly considered before a final agreement is reached.
“I would rather keep the house”
This is something we often hear from clients.
It is easy to understand why. A house provides somewhere to live now, while a pension may not be accessible for many years. The difficulty is that giving up a claim against a pension in return for a larger share of the family home is not always as straightforward as it may appear. For example, £200,000 of pension is not necessarily equivalent to £200,000 of property equity or cash.
Different pensions have different features, including retirement ages, guaranteed benefits, tax treatment and the level of income they may eventually provide. Some final salary and public sector pensions can be particularly difficult to value simply by looking at the figure shown on a pension statement. A settlement may therefore look balanced on paper while leaving one person significantly better provided for in retirement.
Some pensions are relatively straightforward. Others are not. Where there are substantial pensions, final salary schemes, public sector pensions, or a significant difference between the parties’ retirement provision, it may be sensible to obtain specialist advice. A Pensions on Divorce Expert, usually referred to as a PODE, can prepare a report looking at issues such as what percentage pension share may be needed to achieve a particular level of retirement income for each spouse. This can be especially important where one person has spent time away from work, worked reduced hours, or earned less while caring for the family. Those decisions may have affected not only their income during the marriage, but also the pension provision they have been able to build for the future.
A financial settlement on divorce often involves balancing immediate needs with longer-term security. Having enough money to buy or retain a suitable home may be the main concern at the time of separation. But retirement may still be many years away, and decisions made during divorce can have consequences long after the proceedings have ended. That is why pensions should not be treated as an afterthought. It does not necessarily mean they must be shared. In some cases, it may be appropriate for each person to retain different assets. What matters is understanding the value and effect of those assets before making a final decision.
If you are going through a divorce or dissolution, pensions should form part of the financial disclosure and should be considered carefully before any final agreement is reached. A pension may not feel as important as the family home today, but it can play a major part in your financial security in the years ahead.
For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation.