Curtis Banks’ Caitlin Southall, looks at the key considerations around pensions for couples going through a divorce.
It’s been a few months now since the introduction of no fault divorce via the Divorce, Dissolution and Separation Act (2020). Before the new laws were introduced, one of the parties would need to be able to evidence that there had been an ‘irretrievable breakdown’ in the marriage. The new laws were introduced to remove the need for blame to be apportioned, allowing couples to focus on practical day to day issues, like finance, housing and childcare.
At Curtis Banks, we have seen a 33% increase in new pension sharing order instructions from January to September 2022, against the same period last year. According to national statistics, the introduction of the new laws did see a spike in quarterly divorce applications, with April- June 2022 seeing a 22% increase against the same quarter last year. This quarter saw the highest rate in quarterly divorce and dissolution applications in a decade, perhaps demonstrating the additional flexibility that the new laws bring, or maybe as a result of a backlog of divorce cases stemming from the pandemic.
Pension sharing myth
When a couple divorce, there is no set method as to how finances will be split. It’s been reported recently that as many as 70% of divorcing couples don’t share pensions as part of the settlement. One might assume that as pensions are in personal names, and are often associated with a specific employer, that they are off limits for settlements. But this isn’t the case.
So if a divorcing couple wants to include either one or more pensions in a divorce settlement, how does it work? A pension sharing order is a court order, issued as part of the settlement proceedings. The sharing order is a way of splitting a pension between two people following a divorce or the dissolution of a civil partnership. The order enables part of one party’s pension to be transferred to another party without breaking the normal pension rules. It is worth remembering that any protected lifetime allowance may need to be reassessed.
If a pension is shared following the issuing of a pension sharing order, and there is no lifetime allowance protection in place, the original pension holder should principally be able to rebuild the pension via funds that can be directed into their pension from their other sources of wealth by way of contributions (subject to usual pension rules) to help rebuild their ‘lost funds’ within the pension.
For those who receive the pension credit, any uncrystallised funds received from a pension sharing order would be tested against the lifetime allowance in the usual way. Any funds received from crystallised funds would also be tested, however they would not have any entitlement to tax-free cash.
Another point to consider here with disqualifying pensions credits is that the recipient can apply for lifetime allowance protection. This avoids them being penalised for crystallising funds without benefitting from any tax free cash.
Pensions gender gap
It does seem apparent that it would be women who will be most disadvantaged by not including a pension in a divorce settlement. The average woman in her mid 50s-mid 60s has around £50,000 in their pension. This is compared with an average of nearly £150,000 for a male of the same age range. This gender gap increases further nearing pension age. Recent research all points to career breaks as being one of the primary reasons why the gender gap exists and why women’s pension pots tend to be much lower than men’s.
Pension providers can assist in terms of processing a pension sharing order; however, it’s critical that the divorcing parties consider the pension technicalities and regulations as part of the overall divorce settlement. Advice should be sought from legal or financial advisers as early as possible in the settlement process, to understand the practicalities of splitting any pensions.
The long term effects of the revised divorce laws remain to be seen. But it does already seem the case that divorcing couples need to consider their pension situation more closely, especially taking into account the considerable and stark gender gap that at present shows little sign of closing.
