How pensions are part of divorce

Minister of State for Pensions Steve Webb, speaking at a conference hosted by the Resolution Foundation, has pointed out how crucial it is that economically-weaker spouses, most often the wife, take their soon-to-be-ex-spouse’s future pension into account when addressing financial matters.

Steve Webb’s words are sound advice for anyone going through a divorce, who may have sacrificed their own earning potential and pension, through taking time out of the workplace to care for children.

It is as important for happily married mothers as those going through a separation. Many mothers feel that they must meet the cost of childcare solely out of their pay-packet, and find costs prohibitive when it comes to returning to work – as research from the Resolution Foundation tells us. If they do not return to work, gaps in pension payments then become a problem down the line for married as well as divorcing mothers.

Mr Webb offered advice to divorce lawyers: specifically that they should be “encouraged to always make sure this is properly part of the negotiations and is on the table”. This is, in fact, already a basic consideration for any divorce lawyer looking to get a fair settlement for a client, because pension information is included in Form E, the basic document for financial disclosure between parties in a divorce.

The issue of pensions is particularly apt at the moment because, from 6 April 2015, the new Taxation of Pensions Act comes into force. The headline effect is that it will allow people to take more of their pension as a lump sum upon retirement; the taxation effects will then differ depending on how much is taken. An individual will have the choice of buying a lifetime annuity; designating some, or all, of the fund to provide a drawdown pension; taking an uncrystallised funds pension lump sum; or taking a scheme pension.

For general information about different types of pension schemes and how these may be brought to bear on family law, take a look at Vardags associate Olivia Buchan’s blogs on the subject, here and here.