Written by Samantha Farndale, Partner at Stowe Family Law
The recent statistics revealing that divorce applications have risen to the highest level in a decade come as no surprise to family lawyers.
Enquiries for divorce have been rising exponentially since the Covid-19 pandemic, which put huge pressure on relationships, followed by an ever deeper cost of living crisis, along with changes to the law and the increasing ease of a DIY divorce.
No-fault divorce became law in April 2022, effectively removing the blame element of the process, and allowing people who have chosen to divorce to do so without having to levy allegations against each other or wait a considerable length of time.
This change was long overdue and very welcomed. Blame achieved very little in divorce and often distracted people from tackling the issues that matter. No-fault divorce has helped make things less confrontational between couples, making it easier to reach agreements amicably and without the need for the family court.
But this law change does bring challenges. The move to a simplified no-fault divorce regime coincided with an improved efficiency of the online portal for divorce applications, leading to more people opting to make the application themselves – commonly phrased as DIY divorce.
However, this approach can come at a heavy price. Couples who choose to DIY divorce often also try to negotiate and reach a financial settlement independently from legal and financial advice. A decision that can lead them to make ill-informed choices and ultimately lose out financially, both in the immediate and long-term, by failing to understand the complex landscape surrounding finances on divorce.
One of the most common potential pitfalls of a DIY divorce is where people have not sought legal or financial advice on decisions around the family home, the division of pensions and achieving a ‘clean break,’ where possible. .
As family lawyers, we commonly see that the priority of the primary carer of any children in the relationship is to stay in the family home or have the ability to rehouse to a reasonable standard. This is a totally understandable decision, providing immediate security and routine for the children, and time to heal from the divorce. However, what can seem like a good outcome in the moment, keeping or having a larger share of the equity in the family home over a pension share can have far-reaching financial consequences.
Worryingly, it is an option growing in popularity. In 2017, 33% of orders included a pension sharing order – one that transfers a percentage of one party’s pension to the other. By 2021, this had dropped to just 22%.
It is our job as professionals to support clients through divorce to ensure they have a clear understanding of the full financial implications of any decision, particularly around complex assets such as pensions.
Pensions on divorce are initially valued on the basis of their Cash Equivalent (CE) value. For a defined contributions scheme, such as a money purchase scheme, the CE will be broadly equivalent to the value of the fund based on the contributions made by employee and employer, subject to any investment growth.
But for final salary and career average (defined benefit) schemes, the CE is calculated differently and effectively represents the cash that a fund would pay for a pension holder to exit the scheme. This can be a very different figure to its actual value, and the impact of this is seen most clearly in the predicted income that would be received from the scheme.
In the majority of cases, where there are defined benefits and defined contributions schemes of the same value, the defined benefits scheme will pay much more income in retirement than the defined contributions scheme.
In many DIY divorces, decisions on pensions, if regarded at all, are often made on the value of the CE rather than considering their value in light of the income they will produce, or how much it would costs to replicate any lost benefits on the open market.. This may leave the non-pension holder feeling the division is fair, but could potentially be foregoing a significant claim to recurring income in retirement.
And whilst this is not always the case, this issue significantly impacts women, as they are commonly the primary carer with the immediate focus to stay in the family home or rehouse, and often earn less than their husbands, and therefore have less of their own pension provision.
Already affected by the startling gender pay gap, there is also a significant gender pensions gap, particularly for women who have divorced. A study by the University of Manchester in 2021 looking at pension provision for divorcees aged 55-64 found that men had an average total private pension fund value of £100,000, while women had accrued just £19,000. Leaving many women facing poverty in retirement.
No-fault divorce and a more efficient online application process have played a role in changing the context in which couples choose to go through divorce. And in many areas, this is a welcome change, but it is leaving some people without much needed financial and legal advice.
Divorcing parties must educate themselves on their financial claims following divorce, and take advice to ensure they are considering not just their current financial position, but what the future will look for them over the medium and long-term, and onwards into retirement.
