Pension warning as changes to law leave Britons at risk of ‘retirement poverty’

Pension: Expert gives advice on preparing for retirement

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A shake-up to divorce law is coming in April 2022 which will mean couples will be able to secure a ‘no fault’ divorce within six months of first applying. But concerns have been expressed that this could lead to even fewer cases where pension wealth is fairly shared at the time of the divorce.

Under current law, a divorce can only be granted on the basis of the ‘irretrievable breakdown’ of a marriage. A period of separation of at least two years is regarded as sufficient evidence, provided both parties agree.

To divorce more quickly requires one spouse to demonstrate ‘fault’ on the part of the other spouse. The April 2022 changes will remove this requirement.

Key features of the new system are:

  • Divorce papers can be filed by one or both members of a couple; this has to be done online by default
  • Where one party files for divorce, they then have 28 days to notify the other party; this notification should be by email by default, although a printed confirmation of the sent email should also be sent through the post
  • Twenty weeks after first filing, an application can be made for a ‘conditional order’ for divorce and after 26 weeks, an application can be made for a ‘final order’ for divorce
  • Because divorce orders are granted on a ‘no fault’ basis, a party who does not wish the divorce to go ahead can generally do little to stop it unless proper procedure has not been followed
  • Financial matters are dealt with by a separate and parallel process which can sometimes continue after the final order has been granted

The move to ‘no fault’ divorce has been widely welcomed, but there are concerns that the new law, paired with the move to a more online process, could further undermine the effective sharing of pension wealth at divorce.

There are three main ways in which pension wealth can be taken into account as part of a financial settlement at divorce, as explained by a new paper: ’You’ve got mail’ – the new divorce law and its potential impact on the sharing of pensions in England and Wales’:

  • Pension ‘sharing’ where a formal court order is required and where one spouse is awarded a share of the pension of the other spouse, ending up with a pension in their own right and in their own name
  • Pension ‘attachment’ or earmarking, where one spouse is ordered to receive a share of the pension of the other spouse when it comes into payment
  • Pension offsetting, where pension wealth is taken into account during the settlement but where one spouse agrees to accept a greater share of non-pension assets (e.g. a bigger share of a house) in return for foregoing a share of the pension; this process does not require a court order

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Financial orders are only made in around one in kids divorces, according to the paper, and not all of these financial orders include pension orders. This means that formal orders in respect of pensions only apply in a minority of cases.

The authors raised concerns that the new divorce process could make matters worse. In some cases, a spouse may receive notice that a divorce application has been made just a few months before the court is asked to grant the first divorce order.

They may be shocked to discover that there is little or nothing they can do to stop or delay the process if the other partner is insistent on going ahead.

Taking time to make sure pension rights are included in any settlement and properly valued may be a low priority compared to issues including care of any children, impact on living arrangements and short-term financial support post-divorce.

The authors of the paper called for much greater research and monitoring into what happens during the divorce process with regard to taking account of pension wealth, and for close scrutiny by the Ministry of Justice into whether attitudes and outcomes on pensions change as a result of the new divorce process.

LCP partner and former pensions minister Steve Webb said: “One group currently at high risk of retirement poverty is divorced women.

“In large part this is because relatively little attention is often given at the time of divorce to a financial settlement which gives proper weight to pension wealth.

“It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions.

“Whilst there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions.”

Co-author Rhys Taylor, a family law barrister specialising in pensions on divorce, added: “I very much welcome the new divorce law, but the family justice system needs to be astute to avoid the law of unintended consequences.

“So often pensions are the last thing anyone really wants to think about, especially on divorce.

“Care needs to be taken to ensure that the fair distribution of pension wealth on divorce is not overlooked in this brave new era.”

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