The family home used to be the largest asset in any divorce … but today it can often be pension funds.
Why is this?
The recent growth in stockmarkets has boosted fund values.
Low interest and annuity rates have caused final salary transfer values to balloon, pushed higher by very low gilt yields, which are used to price defined benefit retirement pots.
Older couples divorcing have bigger pension funds.
These factors have not gone unnoticed by financially savvy couples with both parties much more aware of their joint worth these days.
The result is that court orders to split a couple’s pensions in the case of divorce have surged, with a 43 per cent increase in the last year, according to law firm Collyer Bristow.
The number of pension sharing orders, which are issued by courts to divide a pension following a divorce, rose to 11,503, up from 8,027 in 2015/16.
This is despite a three per cent fall in divorces in the UK.
Toby Yerburgh, partner and head of the family team at Collyer Bristow, said: “Pension pots have been a target for years – and their importance has kept growing.
“The bigger the value the more potential for arguments and misunderstandings there are.
“With the average transfer value of final salary schemes being over £210,000 there is a lot of stake, especially amongst higher earners.
“Traditionally, the holder of the bigger pension pot would make a cash payment to avoid the costs involved with splitting a pension. However, with many pensions becoming so valuable, it can be nearly impossible to avoid cutting into them.”
Pension division is applicable to personal pension schemes, schemes you have through work and the Additional State Pension but not the basic State Pension.
The Government’s Money Advice Service lists various ways of addressing this.
With pension sharing, you get a percentage share of any one or more of your ex-partner’s pensions.
This is either transferred into a pension in your name or you can join your ex-partner’s pension scheme. If the pension is transferred to you and you don’t already have your own pension, you’ll have to set one up.
Pensions offsetting involves the value of any pensions being offset against other assets. For example, you might get a bigger share of the family home in return for your ex-partner keeping their pension.
Deferred pension sharing is used if your ex-partner is already retired and receiving their pension, but you haven’t retired and are too young to be paid one. You both make an agreement to share the pension at a later date. This can be complicated to arrange, so legal costs can be higher.
With a deferred lump sum, you get a lump sum payment from your ex-partner’s pension when they retire.
In the case of a pension’s attachment order, you receive some of your ex-partner’s pension when it starts being paid to them. You can get some of the pension income, the lump sum or both.
Pension splitting was introduced in 2000 but it has thrown up issues.
It is now harder for the owner of the bigger pension pot to make a cash payment to their spouse so that they can keep 100 per cent of their pension.
Splitting a pension pot can incur substantial administrative costs and create reinvestment risks.
Because the pot has to go further, each party will get a reduced pension, while the new smaller contribution limits are making it difficult to build the funds back up again.
Alternatively, don’t get divorced after all – the money will go further as a couple than it will for individuals!