Women lose up to £4 billion a year in pension wealth due to divorce. Here’s why
Most couples never discuss pension wealth when they get divorced, which often leaves women worse off later in life. Learn more about this issue here.
Divorce is never an easy experience for anyone involved. Even if both parties know it’s for the best, it can be difficult to face the emotional reality of divorce, as well as the lengthy administrative tasks involved.
It makes sense, then, that a couple might not take a thorough approach to their finances upon divorce. And if they do, immediate financial matters are understandably prioritised, including dividing up shared property, arranging child support, and selling off shared assets.
Yet there is one area that is routinely ignored during divorce proceedings: pensions.
According to research from the Institute and Faculty of Actuaries (IoFA) and Scottish Widows, published by the Standard, only 30% of divorcing couples include pensions as part of their settlement. The research revealed that due to this lack of pension consideration, women collectively lose out on up to £4 billion a year.
What’s more, several pieces of research indicate that women’s pension wealth falls short of men’s overall, and this inequality could be further exacerbated by divorce.
With all this to consider, keep reading to discover the impact of divorce on women’s retirement and the importance of including pensions in any divorce settlement.
Divorce could push women into further pension inequality
Getting divorced can be expensive, no matter how amicable the separation may be, and of course, your household income is likely to change after you’ve split. Women are more likely to bear the brunt of this decrease in income; Legal & General says that women’s income drops by 41% after divorce, whereas men’s decreases by 21%.
Unfortunately, this only contributes to the existing pension inequality between men and women in the UK.
Indeed, without having been divorced, women’s pension wealth is generally much smaller than men’s. The NOW: Pensions Gender Pensions Gap Report 2024 states that women would need to work an additional 19 years to achieve pension parity with their male peers. It says that today, women retire with an average of £69,000 to their name, and men retire with £205,000.
This “gender pension gap” is caused by several key factors, including the gender pay gap and many women taking time out of work in order to raise children. For instance, NOW: Pensions says that a 10-year career break brings women’s pension wealth down by an average of £39,000.
Add divorce to this already unequal situation, and women lose out even further.
This may be because:
- Women are often granted primary custody of children, impeding their ability to work full-time in a higher-paying role
- Typically, a woman may opt to keep the family home in order to minimise the impact of divorce on children, giving up their pension wealth to even out the settlement
- Household and childcare costs may reduce a woman’s ability to make pension contributions above the minimum amount if she is employed.
Of course, every family is unique, and this may not be true for your circumstances even if you’re getting divorced. But these statistics highlight a key issue: if you and your spouse or civil partner are divorcing, it’s crucial to discuss pensions and include them in your financial settlement.
3 ways pensions can be divided upon divorce
- Pension sharing
Pension sharing is one of the most common and amicable ways to divide this asset upon divorce. The court will produce a Pension Sharing Order (PSO), which requires an equal split of pension assets.
Pension wealth is then transferred between the divorcing couple straight away, making for a “clean break”.
- Offsetting
Pension offsetting describes the process of including pension wealth in the whole “package” of a couple’s shared wealth.
For instance, if you own a shared home worth £500,000 and have combined pension wealth of £500,000, one party could walk away with ownership of the house, while the other could take both pensions.
While this works well for some couples, offsetting is very complex and can often be chosen without careful consideration of any future effects.
For example, if the woman in the marriage opted to keep the home and gave up her entire pension in the process, this could hurt her retirement prospects or mean she’d have to sell her home in order to retire comfortably.
As such, it may be wise to consult a financial planner before opting to offset your pension during a divorce.
- Earmarking
Earmarking designates a portion of one party’s pension for the other party, but the pension assets are not transferred until retirement.
This is similar to pension sharing, except that the recipient of pension wealth must wait until the other party takes their benefits in order to receive the transfer. This could be years or even decades in the future, and may require you to remain in contact with your ex for longer than you had hoped.
Working with a Kellands financial planner could help you build a bright future after divorce
No matter how you plan to separate assets on divorce, it’s important to work with professionals who have your best interests at heart.
If you are a woman looking to preserve your wealth and create a new financial plan geared towards your goals, our bespoke financial planning services could be the perfect fit. More broadly, anyone getting divorced can reap the benefits of financial planning, especially if your income and lifestyle have both changed as a result.
Crucially, we’ll look at the potential long-term impact of divorce on your finances, especially your retirement prospects.
To chat to a member of our team, email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.