The Pensions Advisory Group has published a report highlighting the unfair pension distribution, to the extent to which legitimate and very important pension claims on divorce are not pursued.
The Pensions and Lifetime Savings Association have recently reported that a single person will need post-tax income of £10,900 for a minimum standard of living in retirement. Pension sharing is a key stepping stone to ensure that minimum standard of living can be met.
The findings of the Pensions Advisory Group report confirm that just 12% of divorces result in any pension division. This runs against the grain of the position in law and the eagerness of the courts to make sure that pensions are fully taken account of and adjusted as needed to ensure retirement needs can be met.
How do pensions feature on divorce?
Pension claims are generally one of three broad considerations that a divorcing couple need to be alive to and factor in when looking at their financial settlement. Non-pension capital claims and income claims, being the other two areas.
The concept of pension sharing was brought in with the Welfare Reform and Pensions Act 1999. Until the inception of pension sharing, the courts had a limited and ineffective range of tools at their disposal when endorsing financial settlements. Pension sharing was a landmark development in bringing about a greater equality of entitlement on retirement, or at least it ought to have been, coming in and roughly the same time as the landmark ‘equality’ case of White v White.
In its simplest terms, pension sharing enables a divorcing spouse to look to ‘carve out’ a slice of their spouse’s pension and place it in a pension fund of their own. From that point on it is their own pension entitlement, often bringing with it a wealth of benefits mirroring those of the member spouse. Crucially the income from it will be triggered based on the age of the receiving spouse rather than the spouse from whom the pension credit was sourced. It achieves a proper severance of financial ties providing autonomy in retirement to the spouse who, until the divorce was concluded, may have had no pension benefits of their own.
Unfair pension distribution between married men and women
In the broadest of terms, it is, in the most part, wives who have been the main beneficiaries of pension sharing. This is largest down to the significant differences that will tend to exist between the pension benefits of a husband and wife.
Of the 30,000 people over 30 years old who were looked at for the report, the researchers found that married men tend to have the largest pensions. Those aged 45-54 have a median pension wealth of about £86,000 (compared with £40,000 for women) and those aged 55-64 having £185,000 (compared with £55,800 for women). For those aged 65-69, the gap is even wider – median pension wealth for men of that age is just over £212,000, compared to just £35,000 for women.
The data showed that while around 90% of couples have some pension wealth between them, in about half of couples with pensions, one partner has more than 90% of the pension wealth. This disparity is often brought about through the tax benefits that can result from higher earners investing in pensions. Given the size of the disparity however, why do so few couples take steps to remedy it when they go through a divorce?
Why is there not more pension sharing?
A good family solicitor should be highlighting the benefits of looking to redress the pension imbalance and advising their client on the court’s preference that the imbalance should be remedied, whether they are acting for the husband or the wife. In spite of what is very often a clear and unarguable entitlement, there are still many instances where we see pensions sharing abandoned in preference for some other approach.
Some may look to ‘trade in’ their pension entitlements by looking to instead take more of the non-pension capital or potentially a greater amount of maintenance, if maintenance is payable. This might appeal to the non-pension member spouse if, for example, they are looking to purchase a larger home to house themselves and the children for whom they may be the main carer. What this approach disregards however are the many underlying benefits that come with having a pension and the fact that choosing not to pursue the pension in favour of receiving cash now has the potential of leaving that spouse in an extremely vulnerable position on retirement. This concept of taking immediate cash over future pension, known as offsetting, is not an exact science and the courts will tend not to promote it as an appropriate solution. Whilst as a concept, it is simple to understand, and the allure of immediate cash can be a compelling one, it is seldom ever going to be right for a non-pension member spouse.
Many pension members are extremely protective over their pension fund. They may rationalise an argument that they should be entitled to keep it through their having worked for it and be quite unwilling to part with it, having built it up with the expectation of enjoying an early and comfortable retirement. With this in mind, a pension member may be only too willing to part with a greater amount of non-pension capital if it means that they get to preserve that little bit more of their pension. Their spouses may recognise just how protective they are over their pensions and worry that such a protectionist approach could result in a more acrimonious and expensive divorce. They may prefer to avoid the argument by pursuing an offset rather than a pension share.
Whilst it is perfectly right to steer away from acrimony and to instead promote a healthy and constructive divorce, care should be taken not to abandon claims and entitlements that are perfectly justifiable in law and very much promoted by the courts. Pension sharing entitlements were brought in to remedy the pensions imbalance and ingrained discrimination that had existed until that point.
Correcting the unfair pension distribution
It is disappointing that 20 years after its inception, there is still so much work still to be done to properly address the pensions on divorce issue between men and women. In fairness, Parliament did its job by bringing in the pension sharing legislation. I would suggest that the publication of this latest report should act as a clarion call to family lawyers to improve their advice and support to clients so that pension sharing becomes the default rather than the exception in the years ahead.
If you’re concerned about unfair pension distribution please get in touch.