New “no blame” divorce laws came into effect in April 2022, which could lead to a spike in separations.
The rule changes, intended to minimise the potential for conflict between divorcing couples, might also make it easier for pensions to be overlooked during a settlement. The issue is expected to disproportionately affect women.
What are the changes? What could they mean for your clients? And how can Boolers help to ensure pensions are fairly distributed as part of a divorce settlement?
Keep reading to find out.
The changes mark the biggest reform in divorce law for 50 years
Under previous rules, couples had to allocate blame or be separated for at least two years (although this increased to five years if one party wasn’t consenting) for a divorce to go ahead.
The new rules remove these restrictions, as well as the ability to make allegations regarding a spouse’s conduct. Those seeking a divorce will now be able to apply online, using a new service available from 6 April 2022.
The latest government divorce statistics confirm a 26% reduction in divorce petitions from October to December 2021 compared to the same period in 2020. According to a recent Guardian article, this could be at least partly due to couples awaiting the new rules before separating.
The rule change is expected to lead to a rush in divorces like that seen in Scotland back in 2006 when they introduced their own no blame divorce laws.
While the rules shouldn’t affect the financial settlement process, nor necessarily speed it up, there are worries that the rules could detrimentally affect women’s finances, by making it easier to overlook the pension settlements they are due.
Changes could lead to pension wealth being unfairly distributed
Recent figures from the Office for National Statistics (ONS) confirm that private pension wealth remains the largest proportion of your client’s total wealth. While this has been the case from 2008 to 2010, the latest figures (for 2018 to 2020) confirm a rise in the proportion of pension wealth and a drop in property wealth.
(You can read more about this in Simon’s recent blog, ‘Why your clients’ pensions are probably their biggest asset and what this means for their retirement’.)
Your clients could have pensions worth more than the family home (or their partner could) and yet pensions are often overlooked in a divorce.
A 2021 Women and Retirement report from Scottish Widows found that women are losing out on £5 billion of assets each year. Women are far more likely to be affected by pensions not being considered during a divorce, thanks to the gender wealth gap.
Due to increased life expectancy and the potential for increased time spent receiving later-life care, women need larger retirement funds than men.
And yet, according to the ONS, the median salary for a man in 2020 was £31,400 and £20,500 for a woman. Women are more likely to work part-time, and the gender pension gap begins to appear for them between 25 and 34, when those who become mothers typically have a first child.
These factors can affect women’s pension savings, leading to an increased reliance on a partner’s pension.
Boolers can help your female clients get the pension they are entitled to
The gender wealth gap means that it’s often women who are affected by not considering pensions during the divorce process.
When your clients separate, they must factor pensions into their calculations. There are three main ways that pensions can be shared:
1. Pension sharing
A pension sharing order will split pension funds immediately upon divorce. A percentage will be decided on, and that amount will be transferred out of the pension holder’s fund, into a pension in the recipient’s name.
Both parties then have full control over their fund, allowing for a clean break.
2. Pension offsetting
Offsetting pension funds allows both parties to keep their pension funds intact, but the value of those funds will be offset against the value of other assets.
If one partner has a lower pension pot (due to missed contributions when raising children, for example) this could be offset by an increased entitlement to a shared property.
Where a big discrepancy exists, this could leave one partner with an insufficient pension provision.
3. Pension earmarking orders
With a pension earmarking (or “pension attachment”) order, entitlement to a proportion of a partner’s pension arises only once the policyholder takes benefits.
This doesn’t allow for the clean break of a pension sharing order, as one partner’s pension will be reliant on the other. Waiting for a partner to retire could mean working for longer.
Get in touch
If you have clients about to divorce, both parties might benefit from understanding how their pension entitlement will be affected. The process can be complicated, but factoring in pension funds is crucial, so please get in touch if you think we can help.
Email email@example.com or call 0116 240 7070.
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