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Mind the (big) gap: accounting for the true value of pensions in divorce (2024 update)

How much is a pension really worth - and who gets it after divorce? LGFL Director Anne Leiper explores how pension pots can be the financial elephant in the room that nobody can afford to ignore.

 

Enter the elephant

Pensions are something that affect us all. Realising their importance and value is especially important when drawing up your financial agreement in divorce.

For many people, pensions are also the financial elephant in the room: rarely noticed and seldom discussed. However, it’s an important elephant that is there to support you financially in later life and retirement. So, decisions about it can influence your lifestyle long after the divorce process has faded into memory.

If you’ve worked for a long time in a senior position, you may have accrued a pension pot of over £1million. However, if you’ve not worked ‘full-time’ for 30+ years due to raising the children or similar, you may not have accumulated such a big pension pot in your name.

According to the ‘NOW: Pensions’ 2024 gender pensions gap report’, if you take a 10-year career break to raise the kids, you'll lose around £39,000 in lost pension savings. In addition, if you’re a woman, your average pay is currently on average 25% lower than for men. Equally, women who are not working fulltime or at all tend to prioritise short term savings over long term investment, and that includes investing in any existing pension.

The net result is that in 2024, women will retire on average with pension savings of just £69,000, compared to £205,000 for men.

 

The Good Daughter Penalty

That’s a big gap, and one described in a recent webinar as the “Good Daughter Penalty”, created through a series of career gaps including:

  • Raising children
  • Looking after aging parents
  • Continuing care for send children
  • Moving around the country/world with partner

There is also the issue of grandparents stopping work earlier to look after grandchildren, and missing out on making pension contributions as a result.

All this can add up to a massive difference in pension worth for any couple where one partner has been working full time and the other taking a career break, and particularly for women. As the NOW: pensions report states:

“Women need to work an extra 19 years to retire with the same pension amount as men.”

 

The pension gap and divorce

Any pension inequality should have a major impact on any divorce financial settlement, yet it’s estimated that 70% of divorce settlements do not actually include pensions.

Instead, the focus tends to be on the family home and preserving the children’s environment, despite the fact that over time a pension could be worth considerably more in terms of market value.

At LGFL, we always include pensions and property when discussing any divorce or separation financial agreement. We say ‘pensions’ because on average, people have worked in 12 different jobs by the time they reach the age of 55, and each job might have a separate pension scheme.

That’s one reason why we are particularly diligent and tenacious when it comes to your soon-to-be-ex partner/spouse declaring all their finances and assets, aka “full and frank disclosure”.

 

Full and frank disclosure

Any financial settlement must be made on the basis of “full and frank disclosure”. That means that both parties are legally obliged to declare all their assets, and pensions must be accounted for in a divorce settlement.

A cash equivalent transfer value needs to be provided by the pension company in respect of every pension. A pension actuary’s report may also be needed to assist in accurate valuing pensions and calculating the necessary pension sharing order percentages.

With all the figures to hand, a financial settlement can be made that is fair and takes into account what life after divorce will cost for each party, rather than splitting the money straight down the middle.

Any financial settlement must consider the short and medium term needs of both parties, and pensions will deal with long term needs.

 

Pension or house: which is better?

It might seem logical to “swap” a pension for the family home, but we previously explained, this may not provide the best solution or be fair in terms of true value. Always check exactly how much your pension will be worth over your lifetime with your pension provider.

 

A two-way street

Reaching an agreement over pension sharing can be complicated. It’s one of the reasons we always advise anyone considering divorce to take legal advice early on.

If you’re considering separating or filing for divorce, contact us for an appointment to discuss your situation and finances. Our one hour fixed fee consultation allows time to explore issues, and give you information and advice that is tailored to your unique situation. Clients say that having a full 60 minutes to talk to one of our Directors gave them the information, understanding and confidence to start divorce proceedings.

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