Pensions: how to divide the spoils when getting a divorce

Couple facing each other over a negotiating table © Getty
Will she get her fair share?

Women may be missing out on pension assets after a divorce

The government plans to ensure that women involved in divorce negotiations will be given much better advice about their pension options. Penny Mordaunt, the minister for women and equalities, said she had grown increasingly worried about the failure of the divorce courts to ensure women are getting a fair share of couples’ retirement savings; just 36% of divorce settlements include provisions for sharing pension assets.

The minister promised a new campaign to raise awareness of the benefits of pension sharing as well as more effort to ensure couples understand how the process works. The proposals are especially important given the well documented “savings gap”. Women routinely save less than men for retirement, often because they have taken time out of work to take on caring duties, and may be financially dependent on their partners in old age.

The main options

While the pensions system is widely perceived as inflexible, there are several ways to deal with retirement savings during a divorce. The most straightforward option is to simply award one partner a share of their former spouse’s savings, which can then be transferred to a pension plan of their own. Alternatively, a pension can be earmarked, with one partner eligible to share in the income once the pension holder starts claiming it. In other cases, couples choose to leave pension savings entirely with one partner, in return for the other receiving a greater proportion of the couple’s other assets, such as the family home.

However, while couples have several options, pension experts say divorce lawyers often lack the knowledge to help their clients reach a fair outcome. A group of specialist legal experts, known as the Pension Advisory Group, has just published a new best-practice guide for the profession following research showing many divorce lawyers aren’t confident about how to split pensions. There have also been a number of negligence claims against family lawyers accused of failing to consider pensions properly during a divorce.

The issue may have been exacerbated by the pension freedom reforms introduced in 2015. These changed the rules about how and when people may access pension savings. One effect has been to undermine pension earmarking in a divorce settlement.

The Pension Advisory Group warns, for instance, that the terms of some earmarking orders made before the reforms contradict the rules as they now stand. It is possible, for example, that one partner might be able to withdraw their entire pension fund as a cash lump sum, circumventing an order that income generated from the fund should be shared with their former spouse.