Considering pensions and protection when a relationship ends
Shelley and Justin will consider the financial implications of relationships, both marriage and cohabitation, coming to an end.
From a protection perspective they’ll explore the importance of policy ownership, a solution to protecting maintenance payments, and the role added value support services can play.
They’ll outline the main sharing assets options when a relationship ends, including pensions, and explain the key points in the recently updated 'A Guide to the treatment of pensions and divorce' from the Pension advisory group.
Consideration on the role that advisers can play when it comes to both pensions and protection will also be explored.
Learning objectives:
By the end of this session, you will be able to:
- Outline the financial implications of relationships ending.
- Understand the importance of policy ownership and the role protection can play post-divorce.
- Describe the options available for pensions in a divorce settlement.
- Click here to download the webinar slides (PDF)
View transcript
Hello everyone. Thank you for joining the webinar today. Now, just a little bit of housekeeping before we get started. At the end of the presentation, the CPD questions will, appear on your system. Once you have answered those correctly, I should point out, we will then generate an issue with the CPD certificates. Now, do bear in mind there's a lot of people on the call today, so it could take us up to 24 hours, for those certificates to be issued. So please sit tight. Also, on that same system after the, the webinar, but could take a little bit of time. It will be possible for you to be able to access a PDF of the slide deck that we've used today.
So those things will be available if you do have any questions as you go through. We won't be able to answer them today, but please enter them into the chat section and we will endeavour to get back with an answer as quickly as we possibly can after the webinar. Failing that, you could always, direct your or your questions if you prefer, to your usual business development manager or account manager, because they will be able to pass those through to us as well. Okay, without further ado, I think we should, get started on the webinar.
So, hello to all of you, and welcome to our webinar. Now, my name is Justin Corliss. I'm joined today by my colleague Shelly Read. We’re both part of the technical marketing team at Royal London. And today, we’re going to consider the issues relating to pensions and protections when a relationship ends.
Now I’ve chosen my words carefully there, because although we’ll be speaking quite a bit about divorce & civil partnership dissolution, we also recognise that there are an ever-increasing number of committed relationships which aren’t marriages or civil partnerships, so we need to consider the implications for co-habiting relationships coming to an end as well.
I don’t know if you’ll remember this, but a few years back, the Personal Finance Society in conjunction with Resolution, which is an association of 6,500 lawyers and other specialists, produced a document called ‘unlocking the divorce and separation market’. In it they said there were approximately ¼ million divorces and separations in the UK each year and the majority of them needed some form of financial settlement. Unfortunately, when it came to the pension part of the settlement, in many cases this was simply ignored or misunderstood so the paper was a call to arms to get advisers involved in the market.
In fact the document said this was a £500million per annum opportunity which advisers are missing out on. If you think about it, Solicitors are not experts on pensions and protection policies – that’s not their job, they have other things they need to be experts on, so it’s kind of understandable that they’re crying out for help. And hey, who better to provide that than advisers who are experts in pensions and protection.
Now in July 2019, the Pensions Advisory group, created the reference document for pensions and divorce called “A guide to the treatment of pensions on divorce” as they recognised the urgent need for interdisciplinary discussion between lawyers, actuaries and financial advisers to achieve better common understanding and consistency in cases involving pensions on divorce. The Group who created this consisted of, well, financial advisers, solicitors, actuaries and judges as well. The second edition of this has just been issued earlier this year, just in January 2024.
And I’ll be referring to this document as we move through as its kinda impossible not to seen as it’s the go to guide for pensions and divorce now. While is it primarily concerned with pensions when a relationship ends, it does also highlight instances where the establishment of a protection policy or the alteration of one, could be beneficial when a relationship is ending. We’ll also explain at the end how you can get hold of the guide, I guess finding it online would be the easiest way but before I really get into this presentation, I just wanted to highlight one phrase which jumped out at me at the start of the document and highlighted the necessity of advisers in this market and the quote is this - “do not as a lawyer purport to give financial advice”. That’s right they’re not financial advisers and can’t give advice and hence why they, and their clients, really need your help.
But before we go too far, if we want this to be CPDable, we need to have some learning objectives. So, by the end of this session, you’ll be able to: outline the financial implications of relationships ending, understand the importance of policy ownership and the role protection can play post-divorce and describe the options available for pensions in a divorce settlement.
Okay now just a bit of background to help our understanding of the issues impacting divorce, dissolution and separation.
As you can see here, I think it's fairly obvious anyway, the rate of divorce over the last 30 years has shown a downward trend, but the reason behind this is simply that few people are getting married. Fewer people get married, fewer people get divorced; I suppose.
You can see an increase in the number of divorces post lockdown, which frankly isn’t that surprising! You’ll also notice a massive decline in divorces in 2022 and the Office of National Statistics have explained that the Divorce, Dissolution and Separation Act 2020 introduced a minimum period of 20 weeks between the start of proceedings and application for final order. This may have had an impact on the number and timing of divorces taking place from April 2022.
I think what was going on here was the new divorce, dissolution and separation act came into effect from 6 April 2022, so some people may have waited and held off until that new bill became law before starting the proceedings. So, some people may have waited and held off until that new bill became law before starting the proceedings. And what we might find then is that there was just not as many divorces and dissolution is happening in the first quarter of 2022. And we suspect that they might have rolled over or that backlog might have rolled over to 2023. So, we kind of expect there might be an increase in 2023. I guess we'll have to wait and see.
But, you know, it isn't just those divorcing that we're interested in, is it?
Due to cohabitation being a somewhat informal arrangement in the eyes of the law, I don’t have data on the number of these relationships ending. But what is particularly noteworthy is the steady rise of people in cohabiting relationships. The world is steadily changing, and advice and guidance on matters relating to the sharing of assets when relationships need to change with it.
So, our top line on the graph is the total number of people in cohabiting couples since 2002. They’re estimated figures, but estimated by Office of National Statistics, so they are likely to be sufficiently accurate for our purpose today. What that red line, at the top, shows us is there have been a steady increase since 2002 in the number of people in cohabiting couples in the UK. As of 2022, this is estimated to be over 6.8 million people. That’s a lot of people who won’t automatically receive some of the rights afforded to people when a marriage or civil partnership ends.
The bulk of these approx. 5.6million have never been married or in a civil partnership, but the green line at the bottom which remains fairly constant at around 1.1million, shows the number of people cohabitating who have previously been married or in a civil partnership.
This could present a number of challenges. For example, that marriage or civil partnership may not be finished or be dissolved, meaning the spouse or civil partner is still a dependent in the eyes of the law. There could be children from the previous relationship who have rights to assets on the death of that parent. And do you know that getting divorced or dissolving a civil partnership does not automatically revoke a will, so previous spouses or civil partners will still be named beneficiaries unless it’s changed.
Now, the other point I want to draw out is the disparity in pension savings between men and women, and the impact that that can have when a relationship breaks down. Now, although we've seen improvements in gender pay gap, particularly in younger cohorts, many women in the UK continue to face significant challenges in building longer term wealth and overall financial resilience in line with their male counterparts.
Now we're particularly looking at pensions here, and we can see in the chart on the left that the average annual pension contribution for a woman is only £2,582 per annum, compared to £4,397 per annum for men, or only 59% if you prefer it that way.
The 18 to 34 and the 35 to 49 cohorts are a little bit better, not much though. So, on average, women aren't amassing as much pension as men. Just hold that thought for a minute while we look at the image on the right, which is focused on those already divorced and asked about barriers to pension savings. Now 64% of women, but only 54% of men, gave the reason that they don't earn enough to save or save more.
So, from the table on the left, we know that women aren't amassing as much pension wealth and on the right, so post-divorce, we know that more women can't save as much as they'd like due to lack of earnings.
And the point here is pensions are vital for a good standard of living in retirement, we’ve all seen the PLSA retirement income figures which now say a single person needs an income of over £30,000 for a moderate standard of living in retirement. But if women are, on average, approaching divorce with lower levels of pension assets than men, and finding it more difficult to build further pension assets post-divorce than men, then retirement income provision really needs to be high on the agenda when working out a financial settlement on divorce.
But we know that the percentage of divorces involving pension sharing is very low with recent stats showing only 11% of divorcees with a pension yet to be drawn had made an arrangement for pension sharing.
Yes, I appreciate there are many factors involved here. Pension sharing takes time, is likely to incur additional legal fees, might not be appropriate if one party needs to retain the house as they have the children with them, but people grow old and retire, and some consideration needs to be given to retirement income provision. Divorce lawyers are unlikely to focus on this, so financial planning is vital here.
Now the final background point I want to make before plunging in for a deeper dive into some of the detail, is that many people don’t get divorced for years.
Solicitors often see clients to draft a separation agreement, but they might not know the impact that separation has in respect of areas such as wills, intestacy, and pension death benefits. There are active choices that need to be made about whether a separated spouse should get things like pension death benefits and be named on an expression of wish form, and the fact that adult children might end up without the same choices of pension death benefits if there is still a separated spouse. That is due to the fact that a separated spouse is still considered to be a dependent in eyes of the HMRC.
So, this is a good conversation to have with divorce solicitors but also any estate planning connections as they might not understand pension death benefits.
Also – we know that the chances of divorce increase after the first divorce. Decisions made after a separation or divorce will need revisited after a remarriage or setting up home with a new partner. Is there a will, have expression of wish forms been altered, what about children from previous relationships? That sort of thing.
What I'm going to do is I'm going to hand you over to Shelley now for a closer look at protection issues impacting divorce. So, over to you, Shelley.
Thank you, Justin. So I’m sure we all know someone who has gone through a divorce or separation and it is pretty much always an emotionally difficult time for any couple and their loved ones, but there are procedural matters, like life insurance, that come into play too. Tricky financial questions can crop up even during the most amicable divorce, so it’s understandable if your clients have any questions or concerns about life insurance and divorce settlements. But what exactly happens to your life insurance after separation or divorce? There’s no one-size-fits-all solution, but we’ll look at some of the things to consider over the next 20 mins or so.
I think its important first to note that those going through or recently divorced are classes as a vulnerable client, lets just remind ourselves how the FCA define a vulnerable client. Well they say its “someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”.
Now, interestingly, if we move on something just to note, The FCA are treating this as really important and plan to review firms’ treatment of customers in vulnerable circumstances.
In fact, they say….
We will conduct a review into how firms are acting to understand and respond to the needs of customers in vulnerable circumstances and share our findings by the end of 2024. Our review, so the FCA, will look at firms understanding of consumer needs, the skills and capability of staff, and I think that’s quite important, product and service design, communications and customer service and whether these support the fair treatment of customers in vulnerable circumstances. This will enable us, i.e the FCA, to understand whether those customers most susceptible to harm are receiving good outcomes.
So as our core customer focus today is those who are divorced or going through a separation we must appreciate that these clients are in that vulnerable category.
So from a protection focus there are 4 areas I would like to explore for our divorced or separated clients and they are, flexibility of protection policies, particularly existing plans, how added value support services can be so very important at this stressful life event. And how an undersold protection product can provide a valuable solution to protecting those maintenance payments and finally aside from those clients you might already have in your client bank, should you wish to how do we actively find more clients to have this important protection conversation with.
So lets look at flexibility first and here I’ll be looking at how existing policies are treated after a split and also the importance of how any new policies are set up.
Now Flexibility when setting up a plan is such an important consideration. If your clients have a joint life policy then Joint Life Separation, by this I mean, splitting your joint cover is an option, but there are conditions. You can use this option if clients have taken out Cover on a joint life basis to cover a mortgage and they are the lives assured. Cover can be changed into two separate single life covers if they later separate and as a result: rearrange their mortgage to be in the name of just one, or either of them takes out a new mortgage on a new property.
When joint cover is split to become a single life cover the new single life cover must have; the same terms we applied to the original cover, the same additional features, such as extra premiums or exclusions as the original cover, an amount of cover that’s no greater than the amount of cover that was applicable when they asked us to split your joint cover. And, finally, a term that is at least as long as our minimum term at that time, but no longer than the term remaining on your original cover.
This means that if the time remaining on the original joint cover at the time you ask us to split the joint cover is less than our minimum term at that time, we unfortunately won’t be able to split the cover.
As you would expect, both parties must agree to separate the cover in this way. We’ll need confirmation that the mortgage has been rearranged, this can be either a written confirmation from the lender, or a copy of the new loan offer. The new cover must begin within six months of rearranging the mortgage or taking a new one out.
However, this option isn’t available with every insurance company. If the insurer doesn’t let you separate the two policies, there are two routes you could consider. The first is one party takes over the policy while the second person arranges a new policy or you cancel the policy and take out a new single life policy, however, as you all know, it’s worth bearing in mind that there are potential downsides to doing this. The cost is likely to be higher as the client will now be older than when they took out the original policy, and they may need to go through health checks before a new policy is agreed. So I can’t stress enough, it’s really important to check the new policy is in place before cancelling any existing cover.
So, this is possible but as you can see there are certain restrictions. This is perhaps why many advisers consider a menu plan with two single policies. Aside from other advantages such as double the cover, should a divorce or separation occur then it is very easy for each party to continue with their own policy. The premium will be higher at outset but remember within a menu plan there will only be one plan charge for up to 10 policies within that plan.
Let now have a look at plans written in trust and what happens on divorce or separation.
Divorcing clients - All of our trusts give the power to remove a trustee as long as written notice is sent to their last known address. If however the divorce is still going through it would be better to agree this as part of the settlement. And of course, if an ex-spouse or partner is no longer included as a discretionary beneficiary then they could not benefit from the proceeds of the trust, but we would always recommend using a letter of wishes and clear instructions to the trustees within your will.
And of course, the more recent addition of beneficiary nomination that some providers now offer allow a client to remove a beneficiary and add a new one, actually up to 5 beneficiaries, very easily.
So at Royal London, all of our trusts give the power to remove a trustee as long as written notice is sent to their last known address. If, however, the divorce is still going through, it would probably be better to agree this as part of the settlement. And of course, if an ex-spouse or partner is no longer included as a discretionary beneficiary, then they could not benefit from the proceeds of the trust. But we would always recommend using a letter of wishes and clear instructions to the trustees within your will.
And of course, the more recent addition of contractual beneficiary nomination that some providers now offer allow a client to remove beneficiary or to add a new one. You can actually add up to five beneficiaries and this can be done very easily.
Now flexibility, the cover usually comes with cover increase options or guaranteed insure ability options. Now that's applicable if we gave standard terms, and it means you could increase your amount of cover in certain circumstances without giving us any medical information. So how does this work? Well, you can increase your amount of cover without giving us any medical information. If the person covered gets divorced or dissolves a civil partnership, all you need to do is to ask the provider to increase the cover within six months of the event happening, and the person covered must be under the age of 55. If there are two people covered, then both of them must be under the age of 55 at the time of the request to increase.
Now, the total you can increase your cover by is limited by the following amounts. And we need to say some evidence of the event. So our course object today we would need to say for example a divorce certificate. Now the maximum amount that you can increase your cover by is the lowest of half your original amount of cover, payable as a lump sum. Or £10,000 a year for cover payable as regular payments.
Now the new cover will have the same additional features as the original cover, and it must last at least as long as a minimum term at that time, but no longer than the time remaining on the original cover. So once again, is the time remaining on the original cover is less than our minimum term at that time. Then I'm afraid you can't increase your cover in that way.
Now, as you would expect, there are some exclusions to apply. You can't increase cover if we're paying a claim, considering paying a claim, or if a medical practitioner has given the person covered a diagnosis or a possible diagnosis that would allow you to make a claim. And I think you would expect that. And we can't increase cover if you're not resident in the UK, Jersey, Guernsey or the Isle of Man.
Now if we move on to the next slide. Let's consider no added value support service that comes with most modern protection policies.
At Royal London is called Helping Hand and it's run by Red Arc, who are an independent nurse advice service. So, if the plan owner or their partner and children are going through a difficult time, such as a divorce, Helping Hand will also be there to offer support and signposting.
So here I've made a list of some of the support, services and guidance that I think would be invaluable at the time of going through a separation or divorce. And it's interesting to note that not all are medical. So, clients may need some legal signposting help at the early stages of their decision to split up. They might need recruitment help if a separation means that they now need to go back to work, or to reconsider their career choice. Of course, emotional counselling and mental health support could provide invaluable to your clients who are going through this difficult time. And for the policyholders’ children, Red Arc can arrange support and counselling which I think could really help a child or young adult, talking to someone outside of their family group. And we can also signpost to state benefit advice to check your newly divorced clients are receiving all state benefits applicable to their individual circumstances. As well as budgeting advice and this might be particularly relevant currently in the cost-of-living crisis, when family income may be much reduced. And finally, remember to talk to your clients about the need for advice on wills and guardianship, or to change their current instructions.
Now, for many newly divorced or separated parents who take on the role of primary childcare, then maintenance payments may form a large part of their income. So, let's now have a look at an example of this.
This is newly divorced clients. It's Jenny and Mike, they're both young at 29, or they are compared to me, and sadly, they've recently got divorced. They've got two dependent children that they're still very small at 3 or 4. And as part of the divorce settlement, Mike has agreed to pay child maintenance to Jenny for the value of £630 per month. And those payments will be back until the youngest child turns 20 which will be in 17 years’ time.
So I'm sure like any parents on the call today, including myself, we would like to ensure that we keep our children safe and happy with a comfortable home, to still enjoy things like summer holidays, to be able to go on school trips, complete their education, have great Christmas memories, have the best trainers, whatever it might be. But in our example, what if Mike dies? What if he died or became ill? What might happen to those maintenance payments? Well, the likelihood is that they will stop altogether. Definitely if Mike dies, and if he gets ill and can't work, then they might become a real struggle for him to maintain.
But the good news is there is a policy which will cover these monthly commitments. A family income benefit policy is a really great solution to protect those maintenance payments. So it can be set up to coincide with the amount of monthly commitment. It can match the years until maybe the youngest child has become financially independent. You can even set up a policy for each child with different terms. Now, sadly, I haven't got a great amount of time today to go into details, but please contact your normal sales BDM at Royal London who will be more than happy to give you more information.
So in our example here, Jenny will without doubt have financial insurable interest as she is dependent on Mike paying those maintenance payments. Now, if she could choose to put the policy in trust, or indeed for a simple policy like this, she could choose to nominate the beneficiary.
Now who should pay the premiums? Well, in our example, Mike could or Jenny could too. We see many examples where the person receiving the maintenance payment. And here that Jennie, we see them paying the premiums as they have complete control then of the premiums being paid and the policy remaining on risk. Whichever way the policy is set up, it will provide real peace of mind that if the person responsible for paying the maintenance dies or is diagnosed with the critical illness, then there is a policy to replace this income.
So many of you on the call today will have good connections with other professional contacts within your local area. And I just wanted to spend a few minutes finally looking at opportunities to talk to divorced clients via those professional connections. And if you wish, as my slide suggests, I think it can be a whole world of opportunity if you wanted to become an expert in this area.
So, family lawyers are an obvious professional contact. These lawyers are speaking to newly divorced clients on a daily basis, but many are unaware of the options available to deal with changing the protection portfolio, or indeed, the need to consider protecting those maintenance payments. And for those of you who have a close contact with Conveyancers, remember that many newly divorced clients may be buying a new property or indeed financially restructuring their existing home arrangements. Now, again, letting agents may be assisting newly divorced or separated clients with finding a new place to live. And of course, these clients won't have a mortgage to protect, but they certainly will have monthly commitments, such as their rent and utility bills to consider protecting.
For those advisers on the call today. Remember, when giving estate planning advice, there is definitely a consideration of such things like protecting, getting maintenance payments and also a wider discussion about protection and IHT planning. Now social media, love it or hate it, it can be a powerful way to gain clients attention. And some of those may even be going through a separation or divorce themselves. And I think this can be a really successful way to start this protection conversation. Now, network groups can also be a great way to increase knowledge of the protection advice needed on divorce to other professional members. But also, there's a very good chance that some will be divorced or separated and didn't realise they needed advice.
And friends and family. Have you actively spoken to those who said like I, going through or have been divorced? And finally, your website, I say many advisors website in the course of my day to day role here at Royal London. And there is always much great content about investment, pensions, mortgages and protection in general. But rarely do I see a specific mention of divorce. And the real value a conversation around existing and protection needs would hold.
So that brings me now to the end of the things I wanted to highlight to you about protection and divorce. Thank you so much for listening. I'm going to now pass back to Justin to look at issues specifically relating to pensions around divorce, dissolution and separation.
Thanks, Shelley. Okay, now we'll take a closer look at issues specifically related to pensions when a relationship ends. And in doing this, we're going to reference the Pension Advisory Group or PAG, or short. We'll mention those quite a bit, and in particular their excellent document I know I've mentioned it already, but I will again, a guide to the treatment of pensions on divorce. Now this is hot off the press too, as I said, with the second edition having only been published in January of this year. And we'll we'll make sure there is a link to this available. With the, with the webinar as well.
Now, I'll talk a lot about PODE’s as we go through this section. And that's an acronym for Pension on Divorce Expert and what their role in the divorce process is. And they do get mentioned quite a lot in the guide. Now, in addition to our focus, on this document, we're also going to look at the role that a financial advisor can play in the divorce process. But we need to remain mindful that not every in fact, probably very few advisors will want to or be able to act as a PODE, as you'll see shortly. So I guess our first stop is to look at the role of financial advisor who isn't a PODE can play in this market, and it is an important role, but it's important that advisors understand the role and the role of other professionals, involved, so that they can determine whether this is a market that they want to get involved in.
So if I was only looking for one point to make to you, and I kind of made it already at the start of the presentation, but I'll reiterated here the quote is, remember, lawyers are not regulated, qualified or insured to give financial advice. Now, there are many instances in divorce proceedings involving pensions which require advice. And if solicitors can't give it, someone else has to. And financial advisors would seem to be best placed to do that. However, the positive impact an advisor can have on the divorce process does not begin and end with regulated advice. There are a number of other skills advisors possess and utilize in non-divorce work, which can add a lot of value and will often include skills that solicitors may not possess or may not be so strong in. For example, establishing the income needs both current and future for one or both of the parties to the to the divorce.
It's very important, particularly in needs-based cases, to determine income needs, which may impact the split of assets in the divorce process, identifying client vulnerability and perhaps implementing a strategy to deal with vulnerable clients. Now, Shelley has just touched on this form of, protection, as she did that from a protection perspective. And clearly, client vulnerability is an area that both the advisors and regulator have had a huge amount of focus on in recent times. It's quite easy to see how divorce could create vulnerability, as it's a life event that most people will not have experienced, and it creates major financial and emotional upheaval. I don't have time today to do justice to dealing with client vulnerability, but please do bear in mind that divorce is one of those life events very likely to create vulnerability in clients that might not otherwise have experienced that vulnerability.
But for that, divorce advisors might be better identifying vulnerability and suggested amending processes to take account of it, perhaps, than some solicitors are identifying when a PODE is required. Now, in the next slide, we're going to look at what a PODE is. And I don't want to spoil the surprise, but you will see they need to hold a lot of the skill set of actuaries to fulfil the brief. Now given professionals with that skill set generally don't come cheap. I think it's fair to assume the PODE isn't automatically instructed at the beginning of every divorce case. Financial advisors could play a vital role here in identifying when a PODE is required. Okay, when we look at some examples of where the PODE is likely to be required, you'll see that solicitors might not necessarily always identify that need.
There's the obvious task of selecting suitable destination plans and pension sharing cases. And then there's the final point, which I think is massive divorce, particularly if you've been married for a considerable period of time, is a life altering event, the likes of which many people will never have experienced. Now, as well as the impact it might have on their personal lives, their financial circumstances are often turned completely on their head, and financial plans and goals may be significantly altered or even disappear altogether. Now, even people who have never taken financial advice may feel the need to do so.
Do you know what? Having a financial advisor involved in the divorce process. Offering this service at a point that the customer needs it, without them having to go and search an unfamiliar market to provide a might be absolutely invaluable to their financial circumstances going forward. So as I mentioned, an PODE acronym for pension on divorce expert, that might not be a term you're very familiar with if you haven't been heavily involved in divorce cases in recent years, or if you haven't, you know, had a chance to have a look at the guide to the Treatment of Pensions on Divorce document. So the role of a PODE is to provide valuations and expert opinion that will ensue, that will assist the parties and the court in the discretionary exercise of valuing assets on divorce.
Let me just be clear that, okay. Their role doesn't include determining which approach or apportionment is appropriate in the case. They'd normally be instructed by both parties, usually for higher value divorce cases, or where the headline value of assets might not reflect the true worth in the hands of different people. That can often arise when dealing with defined benefit. DB pensions, particularly public service pension schemes, and is almost always they are almost always likely to be of use in uniform public service pension cases, where the pension value was over £100,000.
Now, due to much of the work relating to defined benefit schemes, you'd often expect a PODE to have a very firm understanding of actuarial standards. So you see why it's less likely that many financial advisers or planners will act as opposed. But, you know, we've also just considered a number of instances in previous slides where advisors and planners will still have a significant role to play in the divorce process, either instead of or in addition a PODE. But just now, let's move on very briefly and look very briefly. Yet at instances where a PODE is likely to be required.
You have a couple of slides here actually covering when a PODE may and may not be required. I'm not going to spend a lot of time on it, but I did want you to have, these on a slide for reference later on. Remember you'll be able to get the slides, in the site where you can answer the CPD questions and that sort of thing might take a little while to come through.
So the real point that I'm driving at here is that some of the instances where a PODE is required are reasonably easy to identify uniformed, public service, pension schemes. Okay, the DB ones, for example. And you know what? The divorce solicitor is probably likely to identify those. But you know what? There are also a lot of other nuances, like older occupational schemes or section 32 plans, which family law solicitors are perhaps less likely to identify the need for a PODE. And that demonstrates, I think, the benefit of having an advisor involved who is likely to grasp the need in these less obvious situations. Okay, now I'll just tag on to that that we are seeing more and more over 60s divorce, which is a group more likely to have A - significant pension asset and B - more likely to have older style plans, which might have some of these valuation issues that I'm talking about.
Okay. And to help, identify instances where it's less likely that a PODE will be needed, I've outlined some of these two and they're a little bit more obvious, I think, to be honest with you, defined contribution plans with no guarantees mean that the face value is essentially the true value of the plan. If the, people or the or the owners of the pensions are young and or they don't have a lot of assets, it's the least likely to be needed if the pension assets are less than £100,000, even when capitalized. If they're DB plans, then even if a PODE would identify value disparities, the cost of the PODE is likely to outweigh the benefit, so needs to be borne in mind. I'm not going to go through all of them, as I suspect you're getting the idea. But you'll you know, you'll have access to these slides afterwards if you want to have a look at them.
I want to talk very briefly about the legal process for divorces, just to give you a little bit of background knowledge, especially as that has changed recently. So divorce law changed in 2022, and it was partly due to the case of a woman named Tini Owens. Now she's a woman from Worcestershire who wanted to divorce her husband for 40 years. But as her husband contested the split, the law stated she could only obtain a divorce by living apart from him for five years. And that could easily have come along with some reasonable financial hardship for teeny as well. So that wasn't a straightforward thing to do. Now, up until 2022, the law in relation to divorce in England and Wales was governed by the Matrimonial Clauses Act 1973.
And I think it's fair to say society's probably changed a little bit since then. So the new Divorce, Dissolution and Separation Act 2020 became law on April 6th, 2022 and removed the concept of fault from the divorce process. The requirement of placing blame or assigning a specific reason to the irretrievable breakdown of the marriage. This reform is widely expected to reduce acrimony and to result in more, over time, more harmonious separation for many divorcing couples.
Now, under the new no default divorce law, you'll no longer be asked to provide that irretrievable breakdown of a marriage to the court by citing one of the five grounds for divorce that were previously used in the UK. The new divorce act dispenses with reasons or facts as grounds for divorce. Replacing them with a single statement of irretrievable breakdown, which can be filed by either spouse or both of them. Okay, and this means divorcing couples can now file for divorce solely on the basis of the irretrievable breakdown of their marriage, without citing grounds for divorce. Furthermore, the option for either spouse to contest the divorce has also been removed, meaning there is less chance of the divorce process descending into a long, protracted court battle, allowing the application to proceed without friction or additional cost, or with less friction and less additional cost, I probably should say.
So a key point from all of that is that there will now be divorces going ahead that couldn't have happened before, and that has relevance because without a divorce, they can't be a pension sharing order. So it's likely to reduce the instances where someone is trapped in a marriage and can't leave without enduring real financial hardship. And that's what Tini Owens was facing.
Okay, there are two separate legal processes. The dissolution of the marriage and the financial remedy. Now, under the current process, the reason for divorce does not affect the financial settlement. What are the mechanisms? Which a couple can go through to reach a dissolution. Well, what we're going to do is we're going to start from the bottom of the dissolution options up. So from online upwards and will work up the way.
So looking first online or the DIY divorce, as you might have heard it called, that is the cheapest option and it might work. Being married may be a relatively short period of time. Who don't have children and possibly have had minimal assets as well.
You know, it's become a slightly more popular route due to the changes in legal aid funding. Do just watch out though, because as you can see there on that line, it doesn't include a financial remedy having been agreed. And that could come back to bite people in the future. So, just be mindful of that.
The next two in order there is mediation, and that's when a trained mediator tries to help both parties resolve their issues. Kind of like an impartial referee if you like. That will usually be your lawyer could be an advisor who wanted to try to become a mediator if that was of interest to them. They can help with the financial remedy to and, you know, it's a step before to try and prevent going to court, quite honestly. So before going to court and to hopefully reduce the numbers going to court, people who would otherwise be going to court must try mediation before they do. And only if that fails can they take the case to court.
Third option there is collaborative law that involves solicitors and financial advisors. Often as specialists also aim to avoid court but doesn't rule it out. And then the fourth option that we've got there, the most expensive option going to court for a judge to decide. Now, clearly many people want to avoid this, but it might be necessary to get the right outcome for both parties in terms of pension sharing, for example, or if one party thinks the other party might be hiding some assets, or just in cases where it's a really high value case.
Moving down to the financial remedy. Now, do bear in mind that the financial remedy will always prioritise the needs of the children. It'll start from a 50/50 position doesn't necessarily end up there. And the financial remedy really needs to be sorted out at the time of the divorce. Or it can come back to create issues later on. Now just a bit of a difference here between Scotland and the rest of the United Kingdom. In the rest of the UK, the vast majority of assets can be shared on the acquired from date of Marriage.So that's a little bit of a difference there.
Now let's turn to the, pension options. Now, there were three options for dealing with a pension asset in a divorce. I suppose there is a fourth, which is not taking into consideration at all, but of course, that's not allowable. However, there are some surprisingly recent instances where that's still happening so let's make sure that's not one of your cases because that's not okay.
So these three options are offsetting attachment orders and pension sharing. Now as attachment is less commonly used. I'm just going to focus today on offsetting and pension sharing. I think they're the ones you you're most likely to come up against. It is really important to note, though, that whichever option is eventually taken, proper valuation of the pension assets will still obtain the fairest deal for your client.
Okay, so offsetting still, the most common option, will allow for a clean break. Within a one party is likely, though, to have a retirement income need. And they need help to understand what they would need to do to have a good retirement thereafter. You know what? There is a bit of a perception now amongst some clients that offsetting actually prevents their spouse getting any value at all from the pension. Okay, we've heard comments along the lines of at least he or she hasn't got their hands on my pension. Whereas in fact, okay, where these people have received proper legal and financial advice, their spouse will have received value off the pension, just in a different form. Given this situation, it does make sense for some clients to actively choose their pension. Okay, choose to share it, which after all, they might not get for some years to come, particularly if they are fairly young, rather than give up what might be a treasured asset now.
In most cases, however, okay, offsetting will be the chosen option, except where the pension fund represents a very large proportion of the. Situation, the client may simply not have enough in the form of other assets to offset against a share of the pension. And do you know what? That was something that was pretty prevalent a couple of years ago when there were lots of, really big DB, valuations for, for DB transfers and people. To look at shares there because they just didn't have anything other assets to. To equal the value of the DB share.
Anyway, the Pension Advisory Group states that offsetting is quick, simple and or cheap, and it can be. But it is important to remember some other factors that can impact offsetting as well. So we have the taxation. Let's remember some assets acquired in an offset agreement. Might give rise to tax an annuity, be an example of that or not. So for example, the family home obviously wouldn't give rise to tax. And that demonstrates the importance of the next point that we've got there. How do you value a pension against other assets. The pre pension freedoms guide. That's not as easy as I'm making it sound, by the way the pre pension freedoms case of Maskell versus Maskell stated that you can't value a pension in the same way that you would value any other asset as it could only be used for PCLS or tax free cash and income.
But of course, when the member is over 55 now, they can access the whole amount. But what does that mean in terms of taxation? To withdraw a large sum would mean firstly triggering the money purchase annual allowance if it came from a money purchase scheme. As well as potentially becoming an additional rate taxpayer. And you can see why the services of a PODE might be required there to work out what the split should be.
The next point we have there is complaints. Now the guide states, and I'm quoting here, where there has been claims of negligence made against family lawyers in the field of pensions, it has overwhelmingly been in the cases where offsetting has been the chosen remedy, not pension sharing. And that's the end of that quote. Now, if nothing else, that suggests to me that solicitors involved in divorce cases involving pensions need to give closer attention to the nuances of valuing pension assets for the purposes of offsetting.
We've got primary care up there now. Divorcing wives often understandably wish to concentrate on the present need to house themselves and their dependent children, even if that involves the compromise of their claims, which undervalues the pension entitlement of their husband. As the guide states. And I quote once again here, the treatment of pensions on divorce might be seen as the last area of unintended discrimination against wives on divorce. And that's the end of that quote.
Now, the final point there of equity release, I include as that is growing in popularity and it could be seen as an option for older clients who, following an offset, find that much of their wealth is locked up in a property that they don't wish to sell.
Okay, now let's look at pension sharing in a bit more detail. Now pension sharing can be a very fair option. It's a clean break. And of course, it will help to satisfy the retirement income need of the non pension owning spouse. Although statistics over the last few years, you know, they do show an increase in the number of pension sharing orders. We need to remember that that was from a very low base okay. So although that has seen an increase in it may be still not to a huge number. Now two possible reasons are that wives often feel that they can't pursue their husbands pensions because of the emotional and personal costs being too high. And at the same time, some husbands who generally still are the higher pension holders, still find it difficult to accept that their pension fund, accrued through a long marriage, is regarded as a matrimonial asset. So a few potential reasons.
They also what is shared is significant as well. Now the non pension owning spouse might not just want a defined benefit pension or share of the defined benefit pension. If there was an option for having various ones as they might want to share of a personal pension too, as it offers a little bit more flexibility anyway. Pension sharing allows the physical split of pension benefits. Now, unfunded public sector pension schemes will invariably just offer shadow scheme membership for the spouse, but funded and private sector schemes, can offer either shadow membership or a transfer out of a portion of benefits.
Do just be aware, too, that the trustees might not be as focused on shadow scheme members. They might be more focused on their own, so there might be restrictions placed on shadow scheme members like they might not be able to get PCLS they might be benefits might be only available from a specific age. So, you know, the spouse might not be able to take benefits early. In addition, it might be the case that if the trustees were going to enhance benefits for the scheme members, but that might not necessarily be the case for shadow scheme members.
You can see towards the bottom there of the second half of the of the slide. I'm just pointing out that the pension sharing order will specify the percentage of, the value. Okay. A pension credit will be owned by the spouse, and the member will receive what's called a corresponding pension debit.
Okay, so when is pension sharing likely to be suitable? Well, I've got three big ones here. We've kind of touched on them anyway, so I'm not going to spend loads of time. But if an asset is too large to offset okay. So your pension is so big that you don't have other assets that are worth 50% of it, then you can't necessarily always offset it. You might be able to do an offset and a pension share at the same time. It could be a good way to prevent the sale of treasured assets. So, if there is a pension asset worth the same value of the home, and the home doesn't want to be sold, it could be a case of one person takes the home, the other takes the pension asset. And it could be a case that where one of the parties, one with the spouse, has very limited pension provision or perhaps no pension provision at all, pension sharing can be a great way to satisfy that retirement income need that that spouse is eventually going to have without them having to build that up themselves.
Now, on the flip side, I suppose there could be, an issue if the pension credit is going to be too small, as some providers will have a minimum transfer value that they accept in that situation. I guess they might not be too much other option than offsetting.
The next two slides just lists the types of schemes which can and can't be shared. Now, I've just put these in for your reference, but I'm sure that you could recognize that. Solicitors might not always be as likely to know which pensions can and can't be shared. In fact, excuse me, one adviser who did create some really strong professional connections with solicitors, used this list to highlight the adviser's expertise and why solicitors should involve advisers in divorce cases. She simply took this along and asked which of these pension schemes the solicitor had heard of, and what issues they might face with them on divorce. And what she found pretty quickly was that they hadn't actually heard of a lot of the schemes, and fairly quickly recognized that they needed her help and the benefit that she would bring along.
And here's a list of the schemes which can't be shared. I just want to highlight that the basic and new state pension can't be shared. But I'll talk about that a little bit more in the in the next slide. But just you know, although they can't be shared, doesn't mean that they shouldn't be taken into consideration. When we're looking at their value, because that still represents an overall value even though that particular asset can't actually be shared.
Just before we finish up, we want to have a just a quick look at pension sharing and the state pension. Now until 2016, pension rules allowed for dependent spouses, who didn't have a sufficient national insurance record of their own to claim state pension benefits based on their spouses, usually their husbands, because it was normally women that did this, on their husbands national insurance record. And this option, ceased, following the introduction of the new state pension on the 6th of April, 2016.
So the old by the old state pension. It was made up of two parts. Okay. And you can see those there, the basic state pension and the new state pension and, I'm sorry, and the additional state pension and parts of that, can be shared. So the additional state pension benefits, but not basic state pension may be shared in the event of a divorce. The basic state pension can't be split or shared on divorce. There are things known as substitution, which is more than we want to get into, just today. But, but just bear in mind that, you know, there are little bits of the additional state pension that can be shared, but the basic and the new state pension, it's not possible to, to do so.
So on divorce, it is still possible to apply for a share of any protected payments or additional state pension. Atlas of the date of the divorce or whether the spouse, with the pendant with the benefit has reached, state pension age.
Okay, that's all we've really got time for today. But just before we go, we've got a few planning points that we want to include here. So going through those, you know, have you discussed with solicitor connections where you can add value in the divorce process and create better outcomes for clients? Remember to review protection needs regularly segment client banks to identify the special needs of different groups of clients. And remember, your pension knowledge possibly puts you in a much better position to identify when a PODE might be required to achieve the best outcome for a client. And that might not be something that, your divorce solicitor clients will always be identifying.
Now, as I suspect you're all desperate to do some extra reading on this subject. Here are some good sources of, extra reading. This first one you've seen a good few time as we've gone through. The guide to, the treatment of pensions on divorced four. Make sure you that you've got, links available to that and a couple of other guides from advicenow.org that might be useful. They both called a survival guide to. And the first one you can see is pensions on divorce. And the next one is living together and breaking up.
I'll let you have a look at and then another look at the learning outcomes. Hopefully you feel that these have been met for you. And the legals, of course, you wouldn't want to miss those. And it really just leaves me to say thank you very much for your time. I hope you found that useful. Now, as I mentioned at the start, if you have any comments or questions, please leave those in the, in the feedback or the chat section and we will get back to you as soon as possible, but it probably won't be today. Once this session finishes, just remember there will be some CPD questions for you to answer. Once you have answered those correctly that will generate your CPD certificate. Once again, please understand that it might take up to 24 hours for that to be generated for you. There should be links on the, on that same section for you to be able to get a PDF copy of the slides as well, but really just wanted to say thank you all very much for attending.
If you are looking for further insight, find below recommended articles:
CPD certificate of completion
Once you've reviewed the CPD content, simply complete the short quiz below and fill out your details to receive a CPD certificate of completion.
Check your knowledge
To gain your CPD certificate answer the following questions.