Understanding Pension Sharing: Comparing Defined Benefit, Public Sector, and Money Purchase Schemes

Posted on June 11, 2024 by Lara Davies

OLS Solicitors Blog

Understanding Pension Sharing: Comparing Defined Benefit, Public Sector, and Money Purchase Schemes

By Lara Davies on June 11, 2024

The hands of an elderly couple hold a pink money box together, symbolizing their shared commitment to saving for the future and retirement

Pension sharing is a critical concept in the realm of divorce proceedings, as it dictates how pension benefits are split between divorcing spouses. This blog aims to elucidate the complexities of pension sharing, particularly focusing on Defined Benefit (DB) schemes, comparing them with public sector pensions and Money Purchase (Defined Contribution) schemes.

Understanding Defined Benefit Schemes

Defined Benefit pension schemes promise to pay a set level of pension benefit, determined by factors such as salary history and length of employment. The benefits of DB schemes include:

Predictability: Members know in advance what their pension will be, providing a stable financial outlook for retirement.

Employer Responsibility: The onus is on the employer to fund the scheme adequately to meet its obligations, reducing investment risk for employees.

Pension Sharing in Defined Benefit Schemes

When it comes to pension sharing in DB schemes, the process involves several key steps:

Valuation: The first step in pension sharing is to value the pension rights. For DB schemes, this is typically done through the Cash Equivalent Transfer Value (CETV), which represents the lump sum value of the pension benefits if they were to be transferred out of the scheme.

Division: Once the CETV is established, the pension can be divided between the parties. This division is not necessarily equal and can be influenced by negotiation or court orders.

Comparison with Public Sector Pensions

Public sector pensions, while also typically DB schemes, have distinctive characteristics:

Non-Fundability: Most public sector schemes are unfunded, meaning they do not have a pot of money set aside to pay pensions. Instead, pensions are paid directly from current government revenue.

Protection: Public sector pensions are generally well-protected and backed by government promises, making them considered safer and more stable.

Valuation Complexities: The valuation of public sector pensions for sharing purposes can be more complex due to the unfunded nature and the specific rules that apply to these pensions.

Differences from Money Purchase Schemes

Money Purchase, or Defined Contribution schemes, stand in contrast to DB schemes and involve different considerations in pension sharing:

Investment Risk: The investment risk in Money Purchase schemes lies with the individual, not the employer. The value of the pension pot can fluctuate based on investment performance.

Valuation: The valuation of a Money Purchase scheme is straightforward—the current value of the pension pot is what will be shared.

Flexibility: These schemes often offer more flexibility in terms of investment choices and when and how to draw retirement benefits.

Key Considerations in Valuing Pensions for Sharing

Valuing pensions for the purpose of sharing during divorce requires considering several factors:

Type of Scheme: As illustrated, the type of pension scheme significantly affects how it is valued and shared.

Actuarial Valuations: For DB schemes, particularly in complex cases or where large benefits are involved, a more detailed actuarial valuation might be necessary beyond the standard CETV.

Economic Conditions: Economic factors such as interest rates and inflation can impact pension valuations, particularly for DB schemes where long-term liabilities must be assessed.

Legal Framework: The legal framework surrounding pensions and divorce can vary, affecting how pensions are valued and divided. This includes not only the laws pertaining to divorce but also those specifically governing different types of pension schemes.

Wrapping up

Pension sharing in the context of divorce is a nuanced area that requires careful consideration of the type of pension scheme involved. Defined Benefit schemes, whether private or public sector, require a detailed approach to valuation that considers the guaranteed nature of the benefits and the scheme’s funding status. In contrast, Money Purchase schemes offer a more straightforward valuation process but introduce higher risk and variability. Understanding these differences is crucial for anyone involved in a divorce that includes pension sharing, ensuring that both parties achieve a fair and equitable settlement. This knowledge is also vital for financial advisors and legal professionals who assist clients through these complex proceedings.

If you would like detailed advice on your situation, please feel free to contact me for further information.

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Bridging the Pension Divide: How to get a fair divorce settlement

Posted on May 9, 2024 by Lara Davies

OLS Solicitors Blog

Bridging the Pension Divide: How to get a fair divorce settlement

By Lara Davies on May 9, 2024

Mature busy business woman financial manager using digital tablet working in office. professional businesswoman executive holding tab technology device standing at work. generative AI

Introduction

Divorce can be an emotionally and financially tumultuous experience, especially for women. One of the most overlooked aspects of divorce settlements is the division of pension assets. Estimates suggest that UK women are missing out on a staggering 2-4 billion in pension savings each year due to inadequate consideration of pensions during divorce proceedings. This alarming trend highlights a pressing need to address the gender pension gap and ensure that women are not disproportionately disadvantaged when their marriages come to an end, spotlighting the critical issue of pension inequality.

The Pension Pitfall: Understanding the Scale of the Issue

The complex nature of pension schemes and the tendency for divorcing parties to prioritize more tangible assets, such as the family home, have contributed to this significant oversight. Research indicates that over a third of divorcees are unaware of the value of their own or their partner’s pension savings. This lack of awareness can have severe consequences, particularly for women who, on average, have significantly lower pension pots compared to their male counterparts, underscoring the importance of understanding one’s pension scheme.

The Gender Pension Gap: A Persistent Challenge

The gender pension gap is a well-documented phenomenon, with women’s average pension savings at retirement age (67) standing at 69,000, compared to 205,000 for men. This disparity is often exacerbated by factors such as career breaks, part-time work, and the gender pay gap. When these factors are combined with the overlooking of pensions during divorce settlements, the financial implications for women can be devastating, affecting both their retirement savings and pension pot.

Pension Splitting: A Vital Step Towards Equality

Pension splitting, or the division of pension assets as part of a divorce settlement, is a crucial step in addressing this imbalance. By ensuring that pensions are given due consideration alongside other assets, such as the family home, women can secure a more equitable financial future. However, the uptake of pension splitting remains low, with estimates suggesting that around 60% of divorces do not involve this crucial step, highlighting the need for a splitting order.

Navigating the Complexities: The Role of Financial Advisers

Financial advisers play a pivotal role in guiding clients through the complexities of pension splitting. They can help clients understand the value of their pension assets, the implications of different settlement options, and the long-term financial consequences of neglecting pensions during the divorce process. By proactively raising the importance of pensions and providing tailored advice, advisers can empower their clients to make informed decisions that safeguard their financial wellbeing, offering essential pensions advice.

Bridging the Awareness Gap: Educating Clients

One of the primary challenges faced by advisers is the lack of client awareness regarding the significance of pensions in divorce settlements. Many clients, particularly women, view pensions as too complicated to bother with, preferring to focus on more tangible assets. Advisers must take a proactive approach in educating their clients, highlighting the long-term implications of overlooking pensions and the potential benefits of pension saving.

Collaborative Approach: Working with Legal Professionals

Advisers can further enhance their impact by collaborating with legal professionals specializing in divorce proceedings. By establishing strong working relationships with solicitors and divorce coaches, advisers can ensure that their clients receive comprehensive support throughout the divorce process. This collaborative approach can help navigate the legal complexities of pension splitting and ensure that women’s financial interests are prioritized.

Overcoming Emotional Barriers: Addressing Client Concerns

Divorce can be an emotionally charged experience, and clients may be reluctant to engage with the intricacies of pension splitting due to fears of ongoing financial entanglement with their ex-partner. Advisers must be prepared to address these concerns sensitively, educating clients on the differences between pension splitting and attachment orders, and emphasizing the long-term benefits of securing a fair division of pension assets.

Leveraging Industry Resources: Empowering Advisers

To better support their clients, advisers can leverage a range of industry resources, such as those provided by Advice Now and the Resolution website. These organizations offer free information and guidance on pension splitting, helping advisers stay up-to-date with the latest developments and best practices in this specialized field, enhancing the quality of pension advice services.

Regional Considerations: Tailoring Advice to Local Contexts

The value of pension assets can vary significantly based on the client’s geographic location and the industries prevalent in their region. Advisers must be attuned to these regional nuances, being mindful of the potential presence of high-value pension schemes, such as those in the banking, military, or manufacturing sectors. By understanding these regional factors, advisers can provide more targeted and effective advice to their clients, ensuring they are well-informed about their pension scheme.

Addressing the Systemic Challenges: Advocating for Change

While individual advisers can make a significant difference in their clients’ lives, addressing the systemic challenges that contribute to pension inequality requires a broader, collaborative approach. Advisers can play a role in advocating for policy changes and industry initiatives that prioritise the equitable division of pension assets during divorce proceedings, ultimately driving systemic change and ensuring a more level playing field for women.

The OLS Advantage: Prioritising Pension Sharing

At OLS Solicitors we recognize the critical importance of pension sharing in divorce settlements. Our team of experienced legal professionals works closely with financial advisers to ensure that our clients’ pension assets are given the attention they deserve. By leveraging our in-depth knowledge of pension fund management and the nuances of regional pension schemes, we are uniquely positioned to secure the best possible outcomes for our clients, empowering them to build a secure financial future post-divorce.

Conclusion: A Call to Action

The alarming gap in pension savings experienced by women during and after divorce is a pressing issue that demands immediate attention. By raising awareness, educating clients, and collaborating with legal professionals, financial advisers can play a pivotal role in bridging this divide and empowering women to achieve greater financial independence. Through a concerted effort to prioritize pension sharing in divorce settlements and promoting automatic enrolment, we can work towards a more equitable future, where women’s long-term financial wellbeing is safeguarded, and the gender pension gap is finally addressed.

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Why Ignoring Pensions in Divorce Can Be Costly

Posted on November 30, 2023November 30, 2023 by Isabel Gillman

OLS Solicitors Blog

Why Ignoring Pensions in Divorce Can Be Costly

By Isabel Gillman on November 30, 2023

why 33% of people do not include pensions in divorce

The Overlooked Asset: Why Ignoring Pensions in Divorce Can Be Costly

Divorce is a complex and emotional process, and it’s common for couples to focus on the immediate issues at hand, such as property division and custody arrangements. However, a startling fact has emerged that underscores a significant oversight in many divorce proceedings: 33% of couples did not obtain a financial order and in 2022, 67% of divorcing couples omitted pensions from their divorce settlements.

The Underestimated Value of Pensions

Pensions are often one of the most valuable assets in a marriage, yet they are frequently overlooked or undervalued during divorce negotiations. This oversight can lead to significant financial disparities, especially for the spouse who might have taken career breaks or worked part-time to care for family, thus accumulating less in their pension.

The Long-term Impact of Neglecting Pensions

The consequences of not addressing pensions in a divorce can be far-reaching. For many, pensions are a key component of retirement planning. Ignoring this asset can result in an unfair division of resources, potentially impacting one’s financial security in later years.

Why Are Pensions Often Overlooked?

1. Complexity: Understanding and valuing pensions can be complex. Many couples, and sometimes even legal advisors, may not fully grasp how to approach this issue.

2. Immediate Concerns: Couples often prioritise immediate assets like homes or savings accounts, overlooking long-term considerations like pensions.

3. Lack of Awareness: There’s a general lack of awareness about the importance of including pensions in financial settlements.

The Importance of Obtaining a Financial Order

A financial order legally separates the financial affairs of a couple, ensuring a fair distribution of assets, including pensions. Without this, either party can make financial claims in the future, leading to legal complications and potential financial loss.

Case Studies: The Cost of Neglect

Consider the stories of those who learned the hard way. John, for instance, neglected to claim a share of his ex-wife’s pension. Years later, he faced financial struggles in retirement, while his ex-wife enjoyed a comfortable pension income. Similarly, Sarah overlooked her entitled share of her husband’s pension, focusing only on immediate assets, which later affected her retirement plans.

Steps to Protect Your Interests

1. Seek Professional Advice: Consult with a financial advisor or a solicitor who specialises in divorce to understand the value of pensions in your case.

2. Insist on a Financial Order:Ensure that all assets, including pensions, are accounted for in the divorce settlement.

3. Educate Yourself:Understand the types of pensions involved and how they can be divided or shared.

Don’t Leave Your Future to Chance

The data is clear: neglecting pensions in divorce can have lasting consequences. As part of a balanced approach to divorce settlements, it’s crucial to consider all assets, especially pensions, to safeguard your financial future. Don’t be part of the statistic; ensure your peace of mind by addressing every aspect of your shared assets, for a fair and secure tomorrow.

This article aims to raise awareness and encourage thoughtful consideration of all assets during divorce proceedings. If you would like bespoke advice about the topic of this article please contact one of our team.