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What proposed law changes could mean for pensions on divorce

Recent years have seen a rise in the number of so-called ‘silver splitters’ – people divorcing in their later years. In 2018 there was a 23% increase in the number of men divorcing aged 65 and over, while the number of women over that age divorcing rose by 38%.

Pensions can be a key consideration in divorce, but there is rising concern that couples divorcing later in life are having to deal with outdated laws that split pension pots down the middle.

However, legal reforms are on the way which could change the way pensions are dealt with on divorce.

‘Paying the price for an ex’s decision not to save into a pension’

As pensions take decades of steady saving to build, it’s perhaps not surprising that splitting lifetime savings can be contentious. And, the current laws mean that courts are presently allowed to also split assets that we accumulated before a couple tied the knot, as well as those built up during the marriage.

A recent case that featured in The Telegraph highlights some of the issues with the current laws. Here, 73-year-old divorcee John Crowe discovered that his wife had no pension when they decided to end their 30-year marriage.

In this case, the court ruled that his ex-spouse was entitled to nearly half his pension pot, including the contributions he made during the years before they were married.

Mr Crowe said he understood the reason for splitting assets such as their home and their savings down the middle, but was unhappy that he had to pay the price for her decision not to save into her pension while she worked for decades.

Mr Crowe said: “She was married to someone else for ten of those years I was saving into the pension. It seems like financial bigamy. How can you be financially responsible for someone you didn’t know existed?”

Pension contributions are unlikely to be ‘mingled’ in the same way as, for example, a contribution to the purchase of a joint property. In theory, therefore, pension contributions could be kept distinct from a contribution made by the other party.

However, it could be more difficult to differentiate between a premarital and a post-marital contribution within the pension itself. Lawyers can argue that it is potentially unfair to exclude premarital contributions on a straight-line basis for a Defined Benefit pension, which is likely to acquire more value towards the end of the contribution period.

Pension law reforms on the way

There are presently two Bills making their way through Parliament that will have a big impact on British divorces.

Baroness Deech has proposed changes to the Divorce Bill, which would help people retain assets they build up before they get married. She has called the current divorce process ‘outdated’ and ‘expensive’ and believes that reforms are crucial to bringing laws in line with the proposed ‘no-fault’ divorce.

Baroness Deech said: “There is no point in reforming divorce law to be no-fault, with the aim of reducing antagonism, if all that antagonism and unpleasantness remains in the financial provision law.”

Her revision has so far passed through the House of Lords with little opposition. It is yet to reach the House of Commons, although she hopes to persuade the government to review the law, as it is ‘totally out of keeping with, and contradicts’ the aims of the other Bill.

‘Not unusual for courts to order pension sharing’

Splitting pension assets can be a complicated process, particularly for older divorcees. It is not unusual for courts to order pension sharing, but one issue with pensions is that they are often not readily accessible, depending on the couple’s age.

The ease of splitting them also often depends on the type of scheme. Defined Contribution pensions are generally easier to split than a Final Salary pension.

Law experts say that the financial ‘need’ of each individual is the most important factor, and it is this that can lead to splitting premarital assets. In the example above, the money Mrs Crowe did not pay into her pension was spent on something else that was likely to have been shared.

Baroness Ros Altmann, a former pensions minister, says that there would be many households in which only one person had saved towards a pension that they would both then rely on. According to the Pensions Policy Institute, there are 50% more women than men facing retirement without any private pension savings.

Maike Currie, of investment firm Fidelity, says that couples often mistakenly thought of the family home as their most valuable asset. “Arguably, the most valuable asset many couples share is the pension of the working spouse,” she says.

“Even if the value of the pension pot is much less than the family property – a pension can do something which a property cannot, and that is provide you with a regular income for life.”

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We’re here to advise you and your clients on all aspects of pensions and financial planning. If you have clients that would benefit from advice, or you’re interested in how you can work more closely with us, please get in touch. Email hello@sovereign-ifa.co.uk or call 01454 416 653.

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