Many couples when they separate don’t given pensions the thought they require. It’s not entirely surprising; most people are more concerned about how they are going to manage in the short-term. It’s hard to look at financial resources that supported one household and try and work out how to make them stretch to now support two.
A house might need to be re-mortgaged, if not sold outright. Money has to be found for movers, furniture, accountants, rental deposits, and lawyers. Joint accounts are being closed and sole ones opened. Arrangements for co-parenting children have to be negotiated. Relationships with extended family members are strained. Maybe even names are being changed. And through it all the parties (and their children even more so, if there are children) are going through a grief process and are under a lot of stress.
And in amongst all of that, it must be easy to look at pension assets as being so separate from the here-and-now that they could almost seem irrelevant. But pensions are far from irrelevant. For those within a decade or so of retirement, the pension assets often represent what your income – and quality of life – is likely to look like in the foreseeable future. In a long marriage where there has been a ‘traditional’ division of labour it is not uncommon for the ‘breadwinner’ to hold almost all of the pension assets, and the ‘homemaker’ to hold little or none.
If pensions are not dealt with, then there is the real possibility that in the short- to medium-term one of the parties will be struggling to survive on only a minimal state pension, whereas the other may have income over and above what they could reasonably require. In these cases, a pension sharing or pension attachment order can redistribute the pension assets to try to make sure that both parties have sufficient income in their retirement to meet their needs.
However the importance of pensions doesn’t just apply to those going through ‘silver divorces’; couples who are young or middle-aged still need to think about pension assets. This is because of the inherent value that pension benefits can have, especially certain schemes usually associated with the public sector or very large employers (like universities, banks or international airlines). It is not at all uncommon in these cases for the value of the pension assets to be higher than all of the other financial resources combined, including the equity in the house.
Sometimes, the pension assets outvalue other assets by more than 100% or even 200%. Suddenly, the pension can become a bit of a bargaining chip. Should the pension be shared to provide for equal future income? Or should it be offset – where one party forgoes a share in the pension for a greater proportion of the funds available now? Or how about somewhere in-between, known as partial-offsetting?
As you can see, the factors in play when considering pension assets are very complicated. The Pensions Advisory Group have produced a report for separating couples to understand pensions better, which is free to download here. If you want to talk about pensions further, or have more general concerns surrounding your separation and want some advice, please do not hesitate to contact Kamal, Callie or Alison.