Much of this is due to a lack of knowledge, and confusing myths about how pensions are divided in divorce. Pensions are unfortunately too often seen as a sole asset, belonging to the owner of the pot, rather than their legal status as a matrimonial asset, capable of being split.
Scottish Widows’ research revealed that 60 per cent of divorced women did not discuss pension assets during divorce, most commonly because they did not know they should.
DB vs DC
Another hurdle my clients face is gaining an accurate valuation of any pension assets, particularly high-value public sector ones. As part of the financial disclosure process, all pensions are initially valued on the basis of their cash equivalent (CE) value.
For a defined contribution scheme, such as a money purchase scheme, the CE will be broadly equivalent to the value of the fund based on the contributions made by employee and employer, subject to any investment growth.
But for final salary and career average (defined benefit) schemes, the CE is calculated differently and effectively represents the cash that a fund would pay for a pension holder to exit the scheme.
This can be wildly different to the sum that would be needed to replicate the projected income from that pension, were a replacement DC scheme be purchased on the open market.
In most cases, where there are DB and DC schemes of the same value, the DB scheme will pay far more income in retirement than the DC scheme. Put simply, a DC scheme with a cash equivalent transfer value of £100,000 is incredibly unlikely to produce as much income in retirement as a DB scheme with the same CETV.
By treating these pensions on the value of their CE, rather than considering their underlying value in light of the income they will produce, a non-pension holder may be foregoing a significant claim and potential future income.
Obtaining a pension actuary report will provide a much more accurate and detailed valuation, and for complex pensions, it is well worth the initial investment in getting one carried out.
Ignoring pensions in divorce can be incredibly risky, with far-reaching implications on long-term financial security. With Scottish Widows’ research putting the cost for women not properly considering pensions in divorce at up to £77,000 in today’s money, the consequences can be disastrous.
What are the options?
There are three main options when dealing with pensions in a divorce: pension sharing via a pension sharing order, or pension attachment order, or pension off-setting.
Pension sharing is when a percentage of a pension is transferred from one party into the other party’s name at the conclusion of the divorce via a pension sharing order. It allows both parties to then manage their pension assets – whether paying into them further or drawing benefits from them – independent of the other.
