Pensions and DIY Divorce

Many couples go through the DIY divorce route to save costs and also to keep the lawyers out. This is a sensible option for some. Simplified forms and the courts new online divorce portal makes it even easier to start proceedings yourself.

If there are assets involved you should draw up a formal financial agreement, called a consent order or clean break order. These documents can be quite complex and confusing and you may need advice or guidance from someone with legal training. Often, couples are not aware of the implications of the agreement that they have reached.

This is particularly the case with the complex area around dealing with pensions on divorce. There has been a 45% increase in the number of couples opting for a pension attachment order between 2015 and 2017 despite some of the drawbacks of this type of pension order.

On divorce, couples need to consider how they will be looking at this very unusual assets which is a pension. Whilst it is not liquid and in many cases, will not be available as a lump sum or monthly income for some time, it is still a very important asset. It is important that when looking at a settlement, income is considered in the short, medium and long term. Obviously, ensuring that you are able to manage cash flow in the long terms is vital many do not place much priority on it.

There a few different ways that pensions can be dealt with on divorce. This can include offsetting, pension sharing and pension attachment.

Offsetting is where the person with the larger pension keeps it in full and the other person keeps other assets to offset the value of the pension. The benefit of this is that there are no costs of splitting the pension and the process could be simpler. However, this is not always the best option as the person who has ended up with the pension may not have sufficient cash flow to purchase a home for themselves and may not have sufficient income in the short term to manage a mortgage. Equally, the person who has relinquished their rights to their ex-husband's pension may not have sufficient income upon retirement.

The second and most popular method of dealing with pensions, especially when offsetting is not possible, is pension sharing. This is where a percentage of the pension pot is removed from one person's pension and shared with the other person by way of debit into a pension in their name. This is the method favoured by the courts and solicitors as the benefits often outweigh the negatives. 

The main benefit is that a pension share can give a couple a clean break and they are able to choose what they wish to do with the pension on retirement. The pension share is not dependant on how long each party works or lives and a new marriage or relationship has no bearing either.

On the other hand, a pension attachment order (called "earmarking" in Scotland) means that the couple will share the income from the pension once the person who owns the pension has retired. It is open for the owner of the pension to retire whenever they wish and to put future contributions into an alternative pension. A pension attachment comes to an end when the other person remarries or the owner of the pension dies. Moreover, a pension attachment does not afford a couple a clean break.

Why then has the number of pension attachment orders increased so drastically in the last few years?

The sharp increase in pension attachment orders has coincided with an upturn in numbers of couples undertaking their own divorce without the help of any trained professionals.

Patrick Connolly, chartered financial planner at Chase de Vere, said in the Financial Times that those opting for a DIY divorce risked making poor choices that could lead one partner to lose out significantly. “This is often a female as men tend to have more pension assets,” he said.

DIY divorces, whilst a good solution for some couples, are clearly not the best option for everyone. In such situation, guidance on the pitfalls of the different options available to them for pensions is invaluable.