Pension planning on divorce is crucial. After the matrimonial home, the asset of greatest value accrued during any marriage is likely to be the pension pot.
One of the challenges for a family lawyer is to explain to a client, especially a wife, why she should not ignore her lack of pension provision during divorce proceedings. Understandably, most clients’ priority is the welfare of the kids. Or keeping the family home. But once a divorce is obtained, it is imperative that the family lawyer has imported expert advice for pension planning on divorce for the client. There are three main outcomes to this pension planning:
- Pension offsetting. This is where the pensions are valued but are not subjected to pension sharing or pension attachment. So, for example, the wife may decide to keep a cash investment saved elsewhere during the marriage but leave the husband’s pension untouched.
- Pension sharing order. This is where a specific pension fund, or a number of funds, are split, along percentage lines. So for example, the husband’s pension fund with Many a Muckle Assurance Ltd worth £100,000, is split so as to give the Wife 40% of the fund value. The details are drawn up on a pension sharing annex and attached to the family court’s financial order on divorce. The pension is split reasonably quickly, once the pension trustees have had time to implement the order (they have 4 months, in fact). You can’t actually get your hands on the money, of course, it is hived off to create your own pension fund ready for your retirement.
- Pension attachment order. The pension fund is not split. Instead an order specifies that a proportion of the pension fund’s benefit, when it pays out at the husband’s retirement, is paid to the wife. Beware: the order dies with the husband so the income is lost to the wife. Ditto if she remarries. This is only used by lawyers in pension planning on divorce in very specific circumstances.
I still come across cases where lawyers have neglected to pay enough attention to pension planning. By way of example, they have neglected to obtain a value for the Additional State Pension for their client or the spouse on the other side. You only need the modest little BR20 form to get this value. Or they accept a pension scheme fund valuation for a final salary scheme instead of importing expert assistance to test the assumptions used in the valuation given. The difference can run into tens of thousand of pounds.
But it is not just being savvy enough as a family lawyer to realise the valuation issues arising in pension planning on divorce. The benefit, it seems to me, of making sure financial planning advice is obtained for a client is that they are guided on two key areas:
- The need to continue to contribute to a pension fund after divorce – this is crucial.
- The need for cash flow modelling from a financial planner during the divorce negotiations so that a specific income need allowing for pension payments after divorce is secured in a maintenance order before the divorce is finalised.
I brushed the dust off this post on pension planning (I have at least 10 draft posts lurking in the wings) when I read about recent research by the Phoenix Group on pension provision for women after divorce. Some of the conclusions are worrying:
- One in three divorced women don’t save any money at all
- A staggering two in five (38%) have no idea what settlement they received after their divorce
- Only 6% received pensions sharing order or a pension earmarking order
All in all, this just reinforces the need for family lawyers to insist upon seeking pension planning advice on divorce for their clients. Leaving it until after the divorce is simply too late.