When it comes to pensions and divorce, decisions that seem reasonable can leave women very seriously disadvantaged. Even when a judge does make a pension sharing order, a lack of financial planning and knowledge can mean that it does more harm than good.
We talked to pensions and divorce expert Debora Price to find out more. She’s Professor of Social Gerontology at The University of Manchester and a member of the Pension Advisory Group. She’ll help us explore why pensions can be so challenging when people are divorcing and how you can help them make better decisions.
“I do want people to really understand the potential long-term consequences of walking away,” Debora told us. “Because if you’re 43 and you’ve got an 8 and a 10 year old child and you’re about to become a single mum for ten years, where’s your pension going to come from?
You’ll be 53 when your youngest is 18. Where’s it going to come from?”
Divorce damages women’s finances more
Most British marriages now follow a one-and-a-half breadwinner model. The wife goes out to work, but she usually earns at most half of what her husband does. That’s very often because she’s working part time, achieving less job security and seniority along the way.
“It’s definitely an effect of marriage,” said Debora. “Unmarried women without children just don’t have these issues. And it has a knock-on effect on the wife’s accumulation of assets, pensions and even spending money.”
If a marriage ends in divorce, that unequal division can create some big challenges.
Wives often have less developed financial networks
A wife very often begins the divorce process with fewer, smaller assets than her husband. And she may have a weaker support network to draw on. Because men are typically more involved in saving and investing, they often already have relationships with financial advisers and lawyers.
That has some very substantial real-world effects.
“The most up-to-date research we have in this area is from the 2000s,” Debora told us.
“Back then, many older divorced women looked set to spend the rest of their lives relying on benefits. More than half of them were living in poverty.”
How divorcing couples handle their pensions was and remains a big contributor to that.
Pensions are poorly understood and hard to value
Pensions are never in joint names. And when a financial adviser talks with a married couple they might talk about widowhood, but they’ll hardly ever cover divorce. Debora told us:
“The wife won’t get advice like: ‘OK, the wealth is building up a bit unevenly here, if you get divorced it might be a bit unfair’.
The husband won’t hear: ‘You might be accruing a pension, but your wife isn’t. Don’t you think you should start making some pension provision for her?’”
There’s also the challenge of even understanding pensions. The pensions world is complex and ever-changing. It’s hard for even professionals to keep a handle on it all. As Debora said:
“Basically, it’s all a bit of a mess. And that’s my official pronouncement!”
So it can be very difficult to assess and communicate the real, long-term value of a pension pot.
It can all just be “a fight too far”
Pension conversations can create a lot of emotion. That’s because men who aren’t looking for a fair solution often don’t want to share their pensions, or sometimes even have them valued: “If you come after my pension it’s war”. So the divorcing wife can see pursuing a pension as a fight too far. It’s much easier to just walk away.
That can leave solicitors and other professionals in a difficult position. Even if they raise the possibility of a pension assessment, the client says no.
"We’ve agreed that we won’t look into it” is a very common response. Then the arrangement comes before a judge.
"They’ll see that the divorcing partners have reached an agreement… so they’ll let it through without asking questions. They’ll feel that both parties have had legal advice and it’s not for them to upset things.”
The problems of pension sharing orders
All that explains why there are so few pension sharing orders.
“It’s hard to assess exactly how many there are. At best, they’re in place for one in eight divorces, but the real figure’s probably closer to one in twenty.”
In most cases, a potentially huge asset is completely ignored.
And when pension sharing orders are put in place, they can do more harm than good. A poorly thought through and implemented one can needlessly devastate the value of a pension pot.
Apparent gains, actual losses
Lack of pensions knowledge can lead to some less-than-ideal decisions. One common choice is for the woman to keep the family home and the man to keep the pension. She gets the property equity, but still has to pay off the mortgage. Even so, it can look like the man’s walking away with much less.
“But he’ll probably buy a new house and go on to pay off his new mortgage,” Debora commented.
"And he’ll keep saving into his pension. The woman will probably have less earning capacity, so she’ll focus on paying off the mortgage. She won’t pay into her own pension. When the man and woman reach 60, he’ll have a house and a pension. She’ll have a house and no pension. At best, she’ll have to keep on working for much longer and won’t be able to choose when to retire. At worst, poor health or other misfortunes could leave her in a very tough place.”
So what can advisers do about it all?
- Meet the couple individually and understand their separate needs. People tend to open up more in one-to-one conversations.
- The earlier you can be involved in divorce proceedings, the more value you can add.
- Make sure the pension is accurately valued and both divorcing people understand its long-term worth. They might still decide that one person holds onto it, but at least they’ll be doing so from a position of knowledge.
- Treat the pension sharing process as a positive not a negative. You’re making sure that both parties get their fair share of the family wealth, both now and in the future. Talking about poverty in old age will scare people and make them clam up.
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