The firm’s findings come in advance of ‘Divorce Day’, a term often used to describe the first working Monday of the year, which is when lawyers often see divorce enquiries surge.
In its analysis, Interactive Investor used an initial pension value of £100,000 at age 40 and assumed a retirement age of 68. It found that a spouse could forgo a financial asset worth over £196,000 if the pension is not included in the divorce settlement – assuming annual growth of 5% (net of fees) over the 28-year period.
The company’s figures also assume that the couple agrees to a pension-sharing arrangement, splitting the pension equally. If the pension grows by 7% annually, then the shared pot will increase to over £332,000.
It found that the financial impact is even more significant the larger the initial pension value is – for example, a £200,000 pension could grow to in excess of £392,000 at 5% annual growth or almost £665,000 at 7% annual growth over the same period.
Dividing pensions in a divorce
Interactive Investor’s Great British Retirement Survey 2023, which surveyed over 9,000 UK savers, found that two-thirds (67%) of divorcees did not discuss pensions during their divorce proceedings.
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Women seemed to be more at risk, with three-quarters of the divorced women who were surveyed admitting they had not discussed pensions as part of their settlement, compared to just over half – 56% – of divorced men.
There are three main approaches to dividing pensions during divorce:
- Pension sharing
This is the most direct option and involves splitting the pension between both parties. A court order will divide the pension, and then a portion is legally transferred to the ex-spouse, creating a separate pension pot in their name. This approach allows the ex-spouse independent control over their pension and ensures a clean financial break. In addition, there are no implications if either party remarries or dies.
- Pension Attachment Order (earmarking)
This entitles one party to receive a share of the pension benefits when the other begins to draw their pension. Payments are made directly to the ex-spouse as part of their retirement income. However, there is no clean break and payments are dependent on the pension-holder’s retirement plans. Additionally, payments stop if the spouse in receipt of the pension remarries or if the pension-holder dies.
- Pension offsetting
This involves offsetting the value of the pension against other assets, such as property or savings. For example, one spouse might retain the pension, while the other takes a larger share of the house. Though this arrangement does provide a clean break and addresses immediate housing concerns, it can be challenging to strike a fair balance. One party may end up with little or no pension provision.
Dividing finances ‘is frequently a contentious issue’
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “The process of untangling two lives is rarely straightforward and often brings emotional and financial challenges. How finances are divided is frequently a contentious issue, with the family home often seen as the most valuable asset, while pensions are overlooked.
“Pensions are widely underestimated, and our research reveals that the majority of divorcing couples don’t even discuss them. This oversight leads many – particularly women – to miss out on future income that should have been theirs. A pension left invested over a long period of time is turbocharged by the power of compounding, where growth is not only on the original contributions but also on previous returns, significantly increasing the overall value of the pot overtime.
“The emotional toll of divorce, the misconception that other assets take precedence, and a lack of awareness about the long-term financial implications are key reasons why pensions are often ignored. Adding to the confusion is the ever-changing pensions landscape, which makes assessing the long-term value of pension pots more challenging.”
Jobson added: “While no one enters a marriage expecting a divorce, understanding your household finances is crucial. It not only provides clarity on your entitlements in the event of a break-up, but also helps couples make informed financial decisions during their relationship.
“Pension considerations in divorce are complex and need careful evaluation. Offsetting pensions against other assets may suit some couples, while splitting the pension or earmarking future payouts may work for others. These issues become even more intricate when either party has been married before. It is worth consulting a solicitor to understand the legal and financial implications of pension division.”
