21/08/2024 by Lottie Kent 0 Comments
Why a Pension Sharing Order could be essential if you’re getting divorced
Find out what a Pension Sharing Order is and discover how obtaining one when you're getting divorced could benefit your long-term financial security.
When you’re going through a divorce, your retirement plans may be the last thing on your mind.
There are likely to be so many more pressing matters, such as who will keep your shared home and how you’ll co-parent your children or pets, if you have any.
However, failing to include a pension sharing arrangement in your divorce settlement could jeopardise your long-term financial security.
Indeed, calculations by Scottish Widows, reported by FTAdviser (8 May 2024), have revealed that divorcing women could collectively be missing out by up to £4.5 billion a year in their pension pots at retirement.
Despite this staggering figure, according to data released by the Institute and Faculty of Actuaries (IFoA) and Scottish Widows, published by the Standard (19 May 2024), only 30% of divorcing couples include pensions in their divorce settlements.
A Pension Sharing Order (PSO) is one way to divide pensionable assets as part of your divorce settlement.
Read on to learn how a PSO works and discover the potential benefits of obtaining one.
A Pension Sharing Order provides an immediate separation of pension assets
A PSO is issued by the court as part of a financial settlement in a divorce. It will state how much of your ex-partner’s pensions you are entitled to receive, or how much of yours they will receive.
A court has the power to apply a PSO to both defined benefit (DB) and defined contribution (DC) pensions, but not your State Pension benefits.
Under a PSO, the court will stipulate what proportion of your pension assets you and your ex-spouse are each entitled to. This will be expressed as a percentage of the pension’s value. For example, if the pension in question is worth £100,000, a 50% share would give you each £50,000. In Scotland, this may be expressed as a percentage or an amount.
It’s important to note that any pensions you and your ex-partner hold will not necessarily be split equally – you might each receive a different percentage amount. The court will calculate how to divide your pensionable assets based on the circumstances of each partner and the financial information they provide. Factors such as your ages, other assets, and incomes may be considered.
If the court makes an order in your favour, you’ll be able to take a share of your ex-partner’s pension immediately. This could mean joining their pension scheme or moving your share into a pension of your own – depending on the rules set by the pension provider.
However, a PSO only comes into effect on the later of the granting of the Decree Absolute or 28 days from the date of the PSO.
As such, it’s important to wait 28 days before applying for your Decree Absolute or you run the risk of your divorce being finalised before the PSO comes into effect.
Without a pension sharing agreement, you could lose out financially during a divorce
There are several other types of pension sharing arrangement to consider, but PSOs are often considered the most popular and easy to access. Unfortunately, women often lose out financially if a pension sharing agreement isn’t included in their divorce settlement.
Indeed, a significant gender pension gap persists in 2024. Figures published by NOW: Pensions (7 February 2024), in partnership with the Pension Policy Institute reveal that by the time women reach age 67, they will have average pension savings of £69,000, compared to a man of the same age who will have average savings of £205,000. This represents a significant disparity of £136,000.
What’s more, data from the Pensions Policy Institute, reported by the Guardian (7 February 2024), suggests that on average, women would need to work an extra 19 years to accumulate the same pension wealth as men.
There are many reasons for this gender disparity in pension wealth, including the gender pay gap which according to the Office for National Statistics (ONS) (1 November 2023), currently stands at 7.7% (2024) – meaning that the average pay for full-time female employees is 7.7% lower than for full-time male employees.
As workplace pension contributions (from both the employee and the employer) are typically tied to earnings, the gender pay gap could mean that a woman accumulates less in her pension pot over the course of her career than a man.
So, including a PSO in your divorce settlement could be crucial for ensuring that you continue to progress towards your retirement goals.
3 key benefits of obtaining a Pension Sharing Order
1. It provides a clean break
Even if your divorce is amicable, maintaining financial ties after your separation is finalised could be inconvenient and stressful.
So, a PSO allows you to divide your pension assets at the time of your divorce. You’ll be able to immediately take control of any pension assets you’re awarded by the court. This clean break could provide you with invaluable financial independence.
In contrast, earmarking – an alternative pension sharing arrangement – requires an ongoing connection, potentially for many years after a divorce.
2. It could ensure that both parties are provided for in retirement
As discussed above, without a pension sharing arrangement in place, you might be unfairly disadvantaged in retirement. This could make it harder for you to achieve your long-term goals.
On the other hand, if you pursue a PSO, a court will calculate the division of pensionable assets objectively, based on the individual circumstances of you and your ex-spouse.
As a result, you may be better placed to keep your retirement plans on track.
3. A PSO will not be affected by future life events
Any application to vary a PSO must be made before it takes effect and before the Decree Absolute has been pronounced.
Once a PSO comes into effect, it cannot be changed. So, if you or your ex-partner remarry, die, or experience any other significant life changes, the PSO stands.
This could provide invaluable peace of mind regarding your financial future.
Get in touch
If you’re feeling overwhelmed by the financial aspects of your divorce, I can help you regain control.
Please get in touch by email lottie@truefinancialdesign.co.uk or call 07824 554288.
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