Pensions and divorce

"There is a lack of awareness and understanding of pension sharing on divorce, not only by the general public but also, unfortunately, by many solicitors. Pensions are, by their nature, somewhat complicated. The benefits from them are also often many years away. Consequently, it's not surprising that many people don't give them the attention that they deserve. With Defined Contribution (DC) pensions, it's normally easier to value these as generally, it's simply the fund value or the transfer value. However, if, as some older plans do, the plan has special benefits such as a 'Guaranteed Annuity Rate', it's not that simple. "It's with Defined Benefit (DB) plans, such as a Final Salary pension scheme, that things get really difficult. Whilst these plans do have a transfer value (known as a CETV), that is rarely a true reflection of the pension's real value. "I've seen cases where the husband had two pensions, both a DC scheme and a DB one. The transfer values on the schemes were similar. The husband offered to share (transfer) the DB one to his wife (my client) as the charges for sharing that scheme were lower than for sharing the DC scheme in this particular case. However, in this particular case, sharing the DB scheme meant that he 'lost' that DB pension but the wife didn't 'gain' a DB pension. Instead, she would receive a transfer value that had to be paid into a DC scheme. "When we crunched the numbers, there was an overall loss in value of around £160,000 to the couple. This was because the wife's DC pension at retirement would have been significantly lower than the husband's DB pension given up. Consequently, transferring the DC scheme (along with an adjustment from other assets to offset the difference) to the wife would be a much better option for both parties, saving them both £80,000 each in terms of pension value. "This case is just one example of how, when getting divorced, involving a specialist pensions and divorce IFA could potentially save you tens, or even hundreds of thousands of pounds, in pension value. "But it's not just that pensions are complex. There is also the conflict between current needs and the future. And, as a rule, people tend to prioritise current needs over longer-term ones. "As a result, one of the problems we see with pensions and divorce is one of offsetting the family home against pensions. One party, typically the wife often takes the house whilst the other party, typically the husband, keeps their pension. This is understandable as one party typically has the main responsibility for child care whereas the other party is the main wage earner. Whilst keeping the house solves the immediate housing problem for the wife, it does create a longer-term issue. That is the issue of a significant pension poverty gender gap for divorcees. This is because the husband, retaining his pension, but having lost his home, has an immediate incentive to get back on the housing ladder. He also normally has the continued earnings to do so. "Whereas for the wife, retirement may seem a long-term away, hence there is not necessarily the same immediate incentive for her to build up her own pension to replace the pension her ex-husband has retained. And, with reduced earnings due to childcare responsibilities, she often has less opportunity to do so. "It's also a case that making higher pension contributions can reduce maintenance or child support. So, the husband often has a financial incentive to increase or rebuild, their pension after divorce. This further exacerbates the gender gap."