DIY Divorcees Run Into Pension Problems

Divorce Pension

The warning comes after a sharp rise in a type of divorce settlement that is relatively easy to arrange but harbours potential drawbacks.

When couples divorce, there are several ways for pension assets to be divided between them, including through so-called “pension attachment orders” and “pension sharing orders”.

A pension attachment order, known in Scotland as pension earmarking, obliges a pension provider or scheme to pay a certain percentage of monthly pension payments from one party to the divorced spouse. Because this is a form of maintenance, it does not allow for a clean financial break between the parties, unlike a pension sharing order, where pension assets are formally divided at the time of separation and the parties left with their own separate retirement funds.

Lawyers say pension sharing orders can be complex to arrange because the fund is physically split, but they do allow each party to take full control over the divided assets.

In spite of the drawbacks of attachment orders, there was a 45 per cent jump in these settlements being granted between 2015 and 2017, from 2,993 to 4,223, according to Family Law Court statistics for England and Wales.

“The statistics are quite surprising given that attachment orders are typically the least common type of settlement,” said Abigail Lowther, senior associate at law firm Hall Brown.

“Attachment orders can have their advantages . . . The pension may be higher in value kept as one whole pension than if there were two separate pensions.” One downside, she added, was that if a spouse remarries they lose the pension income that is subject to the attachment order.

A further disadvantage of attachment orders is that the spouse has to wait until the former partner decides to retire before they can begin to receive pension income. A court cannot compel an ex-spouse to start drawing pension income in order to benefit a former partner.

The spouse with the primary pension can also choose to stop paying into the pension that is subject to the attachment order and start contributing to another, on which their ex-partner has no legal claim.

The 45 per cent jump in attachment orders contrasts with a 15 per cent increase in lump sum orders, where a spouse gets a lump sum payment from their former partner’s pension when they retire. Lump sum orders are by far the most popular way to divide pensions in divorce, with 26,500 of these settlements in 2017, compared with 11,800 pension sharing orders and 4,348 attachment orders.

Ms Lowther said the sharp rise in attachment orders between 2015 and 2017 coincided with an increase in the number of splitting couples doing DIY divorces without the help of a lawyer.

“Unfortunately, there will be a lot of people out there going to court unrepresented, who don’t understand the full implications and consequences of what they have signed up to, especially with pension orders, which are complex,” said Ms Lowther.

Emma Gill, a solicitor with Vardags, family law specialists, said that pension sharing orders can be far more valuable than attachment orders as they leave each spouse “completely and utterly in control” of their retirement fund.

Ms Gill said a rise in couples going to court unrepresented, because they could not access legal aid or wanted to save on costs, meant some were making unwise settlements.

“When you don’t have someone explaining the pitfalls of each option, then that is when you are at risk of walking into the bear traps,” said Ms Gill.

“It isn’t immediately apparent that if your ex-partner were to die then you’d lose your pension, or that they may delay taking that pension, leaving you with no control over when your payments start.”

Patrick Connolly, chartered financial planner at Chase de Vere, said those opting for a DIY divorce risked making poor choices that could lead one partner to lose out significantly. “This is often a female as men tend to have more pension assets,” he said.

There was no “default solution” to dividing pension assets on a divorce, he added, “but attachment orders can have major drawbacks and should generally only be used in a minority of cases”.

Pensions assets, including occupational, personal and even the state second pension, but not the basic state pension, can be split on divorce. The rules over what can be divided are not uniform across the UK, with different rules applying in Scotland.

Ms Gill added that couples going through a DIY divorce process often overlook the state second pension when working out how their retirement assets should be divided.

“The state second pension should be taken into account when considering pension assets because it can be worth tens of thousands of pounds or more, but a lot of people miss it because they don’t know about it,” said Ms Gill.

“A good lawyer, or independent financial adviser, will explain the nuances of pension assets — such as state earnings-related pension (Serps). Without this advice, there can be a lot of missed opportunities.”

Read the full article on Financial Times

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