Divorce and Pensions: Why pensions as an asset get ignored

Following our recent blog on Divorce and Pensions: Who are the Pensions Advisory Group, this blog will focus on why pensions typically get overlooked in a divorce.

As stated in our previous blog, for many divorcing couples, the primary focus at the time of their divorce is how to divide the liquid wealth between them. Liquid wealth usually includes savings, properties and personal belongings of a significant value. Often, these assets can be quantified in monetary terms, making negotiations more effective. Pensions are not as straightforward, and often, their complexity leaves the parties wanting to ignore the asset in its entirety. This is the biggest culprit behind pensions being ignored. It is a risky strategy as it can leave you in a worse position in the future.

Long-term Investment

Pensions are a long-term investment that most hope will take care of our bills upon retirement. At Birkett Long, we find the main assets for our clients are ordinarily the family home and pensions. Often, one party may have a higher pension pot, which they have accumulated whilst being the breadwinner when their partner has been taking care of the home and the children of the family. During negotiations, the immediate want or need to keep the family home can result in the other party ignoring the pensions. 

Opting for Pension Sharing

However, when considering the value of the family home and the increase you are likely to benefit from in the future, foregoing a pension share may be the less favourable outcome. You may be better off long-term if you opt for a pension-sharing order. A pension sharing order is when a part of one person’s pension pot is credited into the other person’s pension pot. Once the transfer has taken place, the pension pots should be similar, and each person is responsible for their own pensions going forward. A pension sharing order compensates the spouse who has made the sacrifice to care for the family whilst the other spouse has been able to work and accumulate a pension pot.

Weakening Position in Negotiations

Even if you do not wish to have a pension share, by ignoring pensions, you may be weakening your position in negotiations. When considering what orders are fair in all the circumstances of the case, the Judge will normally take pensions into account. In doing so, the Judge can consider if the pensions are being offset against other liquid assets or if an order relating to the pensions is required. By taking pensions into account from the outset, you give yourself a better chance of reaching a favourable settlement and mitigate the risk of your agreement not being approved by the court.

Another reason we find that pensions are ignored is simply a lack of knowledge. Clients are still surprised to learn that the court can take pensions into account during a divorce – even if that pension has been accumulated prior to marriage. It is important that legal advice is sought at the outset to ensure that you are fully aware of your rights and what disclosure is required to allow you to negotiate.

Pension Valuation

In the context of pensions, they are initially valued by the pension provider. You will need to request the same before negotiations commence. The transfer value can be referred to as a Cash Equivalent Transfer Value (CETV)/Cash Equivalent Value (CEV)/Cash Equivalent (CE) statement. This document provides a value of your pension pot at the time of the calculation. If you have not received a valuation, you can usually request one for free.

Misconception of Value

It should be noted that just because the value may state that your pension is worth a certain amount, it does not necessarily mean it is worth the same in monetary terms. For example, a pension pot of £200,000 does not mean it is, in fact, worth £200,000 in cash.

Pension Expert Involvement

Depending on your pension’s value, it may be that during the divorce, a pension expert (Actuary) is instructed to look into the true value of your pension and then report on what share would give equality. The cost of an actuarial report can be a deterrence for some clients, but a short-term loss can prevent you from losing out on tens of thousands of pounds. Without taking pensions into account at all, the loss can be even higher. Our next blog will focus on this more and explain what you can do to ensure an accurate value is obtained.

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