Breaking up is hard to do

Divorces among adults aged 60 and over are on the rise, according to the Office for National Statistics. And as more people are finding themselves in family court, there is an increasing demand for specialised pension services.

Although rates overall are in decline, the number of UK divorces among individuals aged 60-plus increased by 73 per cent for men and 82 per cent for women between 1991 and 2011. Factors contributing to this trend include: longer life expectancy and fewer marriages ending in the death of a spouse; a loss of social stigma associated with divorce; and more women participating in the labour market, resulting in greater financial independence and the ability to build their own pensions.

Typically, financial planners become involved at the end of a settlement to implement a pension credit. But working directly with solicitors during the negotiations, to sort out factors that are likely to influence the pension-sharing arrangement, is becoming increasingly common. With more and more people choosing to separate in later life, the issue of pension provisions has suddenly leapfrogged other considerations, making it an integral part of the whole divorce process.

Despite gains in financial security outside marriage, women aged 60-plus have typically accumulated fewer earnings over their lifetimes and have had less time to build adequate savings through employment. This can be because of childcare responsibilities, lower wages and part-time work, for example, making them more reliant on their husband's pension for retirement. Some matrimonial assets, such as a family home, may be transferred to one spouse or another without going to court. However, this is not possible for dividing pension arrangements.

Whose benefit?

In December 2000, legislative changes relevant to pension rights on divorce came into effect under the Welfare Reform and Pensions Act 1999 allowing family courts to make pension-sharing orders. Under such an arrangement, the party with the larger pension may be required to transfer a specified percentage of their pension's worth to their spouse. The party gaining the benefit of the order receives a 'pension credit'.

However, an individual may not be able to take benefit from a pension share for many years. The age of the party receiving the benefit of the order, as well as the rules of the individual scheme, may impact the arrangements. Pension trustees, who are responsible for protecting the interests of pension scheme members, remain in charge.

A pension-sharing order cannot be made until the decree nisi is granted. However, as applications for divorce and ancillary relief proceedings are separate processes, pension-sharing agreements can be, and often are, made after a divorce is final. When handling separations involving older adults, it is necessary for the solicitor to advise whether implementation of a pension-sharing order, before or after the divorce is finalised, is in the client's best interest.

Entitlement confusion

Unfortunately, pension splitting is far from straightforward. Many people assume that if they are married, they are entitled to 50 per cent of the marital assets, but no automatic entitlement to pensions exist. Solicitors are faced with a number of factors to consider when determining an appropriate financial settlement on a marriage breakdown. Differences in age, incomes and pension contributions made by each spouse before, during and after the marriage, as well as the couple's other assets, all impact on the final financial settlement, and make dividing the pension more difficult.

In addition, family courts have no set rules to guide the division of assets, but have significant discretion to redistribute them based on the case circumstances. A party's pension allocation must be carefully reviewed, as legal advisers face a potential negligence claim if it is miscalculated. Simply splitting a pension pot down the middle is rarely advisable for adults aged 60-plus, especially if the income is needed immediately.

According to White v White, decided by the House of Lords in 2000, courts are instructed to assume an equal division of matrimonial assets, unless the merits of the case prevent them from doing so. However, the complex nature of pensions means that a 50:50 split will rarely provide income equality. This can be caused by:

• an age gap between the relevant parties
• changes in the value of individual pensions caused by transfer penalties or market-value reduction penalties
• undervaluing of the cash equivalent because of the current financial climate; or
• special public sector scheme considerations that affect how the pension is split.

Marriage of convenience

Splitting pensions can be a very complex area, and a solicitor will benefit from working with an experienced financial adviser from the outset. Pensions are considered part of the asset pot and can be very valuable in divorces involving older adults or when the couple have been married for a long time - especially if the pension is already in payment.

In some cases, sharing the pension may be the only way a settlement can be achieved if no other assets exist. Thus, it is important to ensure that each person's pension rights are appropriately addressed, as it can have a significant long-term impact on their retirement.

Other financial settlement issues for individuals aged 60-plus to consider may include:

• whether to split the total pension pot rather than the retirement income
• opting to accept the marital home or property in lieu of a pension
• making arrangements for beneficiaries; and
• the existence of any outstanding debts.

If the couple owns a business in which the property is held under a self-invested personal pension (SIPP) or small self-administered scheme (SSAS), the advice of a financial specialist with experience handling this kind of pension arrangements will be required.

Even solicitors who specialise in family law and are experienced in handling financial settlements approach financial advisers to ensure that pensions are divided equitably. Component details of the pension could include: widow's benefits, income provision and whether a pension set-off (taking a larger slice of the non-pension assets) would be better for the client than a formal pension-sharing order.

Given the complexity of divorces involving adults aged 60-plus, and the risks associated with miscalculating pension allocations, it is necessary for financial advisers and solicitors to work together to ensure that the pension rights of both parties are appropriately addressed.

Once the financial details have been agreed, it is a good idea for a consent order to be drawn up for the parties by their solicitors. This ensures that changes to the agreed arrangements, or additional demands for income after the divorce, do not occur and will help protect the future assets of each spouse.

 

Steve Rees is managing director of financial consultancy Carpenter Rees