Pensions are split between couples in less than one in eight (13%) divorces, according to new research by wealth manager St James’s Place (SJP).
Data collected for SJP through a Freedom of Information (FOI) request also points to a decline in pension sharing on divorce.
Despite the common view that pension splitting on divorce is standard practice, a Freedom of Information (FOI) request by SJP found that only a small minority of pensions are split when divorces occur.
SJP says the figures suggest many divorcing couples are missing out on a fair settlement.
It also believes the impact of not sharing a pension is likely to be higher on women who typically have smaller pots than men
The FOI request found that, between 2016 and September 2021, only 80,290 of the 602,491 divorces that were settled in court included a pension disposal by way of a sharing or attachment order. Overall, of the divorces that included a financial remedy 40% factored in pensions.
A pension sharing order is a legally binding agreement to divide pension assets at the time of divorce.
The order normally states how much should be divided alongside other assets such as investments and property. The ‘receiving party’ may be able to become a member of the pension scheme or transfer the value to a new pension provider.
The actual decision with regards to the split can be negotiated between the parties or, if an agreement cannot be made, a court may intervene.
A pension attachment order is another way to split a pension on divorce but does not result in a clean break. The pension remains the property of the ex-spouse and the attachment order directs them to pay the funds when they start to draw them from the scheme. This can cause a number of issues especially if the divorce is acrimonious.
The number of financial disposals that include pensions appears to be decreasing. In 2016, 29% of divorces with a financial disposal included a pension sharing disposal, but this fell to 24% in 2021. Financial disposals that include a pension attachment fell from 12% to 5% over the same period.
Pension attachment orders are significantly more problematic in the long run for both parties, SJP says, because there is no clean break and the receiving spouse will be subject to the taxation and choices made by their ex-spouse, possibly for the rest of their life.
Overall, pensions as part of a financial remedy in either form has been on a decline since 2018 where it appeared to peak, SJP said.
The impact of not sharing a pension could be more significant for women, according to the adviser. According to data from SJP’s latest Financial Health Index, women hold on average £85,500 less than men in workplace-based or privately organised pensions, SJP said.
Claire Trott, divisional director of retirement and holistic planning at SJP, said: “The importance of pensions when considering divorce should not be underestimated. There are many different options available to both parties with regards to financial settlements and the easiest option at the time may not be the right choice in the long run. Pensions are complex at the best of times and even more so when you start to consider splitting them. Financial and actuarial advice is generally the best course of action.
“Pensions in particular can’t just be considered a monetary asset and, taking into account things such as health and life expectancy, a 50/50 split isn’t going to give a fair outcome. This can be even more apparent if you choose to offset one asset against another. For example, exchanging the pension for the house. You need to be clear of the true long-term value of each.”
