Mind the Divorce Gap

Morton Fraser Wealth and Pension Planner Norman Dalgleish
Norman Dalgleish
Wealth and Pension Planner
15 January 2021

Divorce is a difficult, emotional and stressful process.  It can therefore be tempting to just want the whole process to be over as quickly as possible - to be able to move forward with a clean slate. 

The law in Scotland also favours such a 'clean break' principle, where a financial settlement is a one-off package. However, it is also important to note that the one-off settlement agreed (or court order made) will have an impact on your finances for the rest of your life, and therefore it is vital to be fully informed when making any decisions.

Research recently released by Legal & General (L&G) talks about The Divorce Gap: on average, women see their income fall by 33% following divorce whereas for men the fall is only 18%.  There are many factors driving this disparity, but one of them, according to L&G, is a tendency to ignore the value in their partner's pension when coming to an agreement.

This is despite the fact that the law enables a pension fund to be shared on divorce, just like the value of a house or an investment portfolio.  In practical terms, this doesn't mean that a lump sum is taken out of one pension pot and put into the other person's bank account as cash.  Instead, capital is transferred from the payer's pension to the recipient's pension fund, thereby increasing the benefits payable when the pension comes into payment.

At Morton Fraser we regularly deal with pension sharing claims as part of negotiating overall financial settlements. But why would someone not make a claim on their partner's pension?  This may be a proactive choice, perhaps due to a preference for more liquid assets - if there is adequate cash or property available, that will often be more attractive to both parties.  However, there may well often be other factors at play.

  • All too often, the value in a pension is under appreciated, particularly in the case of defined benefit (final salary) pensions which promise to pay an indexed linked pension for the rest of the pension holder's life.  A defined benefit pension of £5,000 per year will have a capital value in excess of £100,000, and it is not uncommon to deal with pension values significantly larger than this. Of course, it's essential to get an accurate valuation.
  • Pensions can be seen - by both clients and maybe even some lawyers - as complicated and 'too difficult' such that the temptation is to ignore them, or to choose the expedient route that each individual simply retains their own pre-existing pension rights. This may be particularly tempting if someone has a number of different pensions which are not all fully available for sharing, or has rights in a non-UK pension scheme.  Exploring a pension share can incur some expense in terms of valuations and actuarial evidence in complex cases, but, depending on the sums involved, this may be a sensible investment. Failing to explore this properly risks entrenching an inequality that exists prior to the divorce: as L&G note, women's pension wealth is already well below that of men's across the wider population.
  • In the not uncommon situation where one partner has been the predominant earner during the relationship, and therefore has typically accrued the majority of the family's pension provision, a deal that can often make intuitive sense is for the pension holder to retain their pension provision in return for making over their share of the family home to the other partner. In some cases this will be a sensible option. However, even if the home is received mortgage free, it clearly cannot provide an ongoing income stream.  Depending on the recipient's age and employment prospects, this can create an income gap which is unlikely to be met by long-term maintenance payments from the former spouse.  It is worth giving some more thought to the use of pension sharing as a means of putting in place an agreement that will provide income in the future, particularly for people who have been out of the workforce for long periods.

The answer to the above is to ensure that the advice you are receiving can competently cover the full range of legal and financial matters, specifically pensions.  By combining one of Scotland's top rated Family Law teams along with a team of Chartered Financial Planners with many years of pension expertise, Morton Fraser is well placed to assist if the need arises.


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