Personal Finance: Till pensions us do part

Teresa Hunter on divorce and dividing the retirement pot
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Indy Lifestyle Online
GETTING DIVORCED is one of the most harrowing experiences people can face. Government officials, divorce lawyers and pensions experts met for high-level talks last week in a bid to hammer out a deal which could ameliorate the agonies of warring couples - if not emotionally, at least financially.

The outcome of these talks was apparent in the Queen's Speech, where the Government laid out its plans for a new Welfare Reform Bill, which will introduce provisions for pensions sharing by divorcing couples.

But until the law is clarified - at the earliest at some point next year - those caught up in a marriage breakdown are trapped in a no-man's land of uncertainty. So what should they do next?

Further delays would be a bitter blow to many women, and some men, who have already endured lengthy postponements of their divorce proceedings in the hope of achieving a fair share of their spouses' pensions.

In something of a volte-face, experts who have battled for nearly 30 years for the right to split a pension, are now reluctantly advising couples to wait no longer, but press ahead with their proceedings. With some disappointment, they are concluding that pension sharing may not be the panacea to all ills that was hoped for.

Pension sharing offers the huge advantage of a clean break at divorce. It allows spouses to take cash from a partner's pension to start their own personal pensions over which they have sole control. Pension fund trustees must comply with any sharing orders within four months. Robin Ellison, head of pensions at the law firm Eversheds, says: "A quick divorce with a clean break is always the most painless option.

"But in nine out of 10 cases it's not worth stringing it out for the sake of a pension. The bitchiness and bitterness go on growing. Costs build up, people get bad tempered and it all becomes counter-productive. No one wins, you just go on losing."

The downside of "sharing" relates to the way the pension is valued, associated costs and the requirement of English courts to make orders based not on a fair share of marital assets, but on the needs of the disadvantaged partner.

Robert Owen, of the Association of Consulting Acturaries explains: "In Scotland assets of a marriage are divided between both partners, but under English law they are split according to need. A court will grant a wife a pension only according to her need. If she has a modest but adequate one in her own right, she may get nothing of her husband's retirement pot."

Where a court does examine the potential for sharing a pension, it will use a "transfer value" of the fund to determine its worth. This is similar to a "surrender value" and as such a much lower figure than the actual worth of the ongoing fund. Under these arrangements, wives will almost certainly be shortchanged.

Finally, couples currently must meet the costs of any sharing arrangements themselves, estimated at around pounds 1,200 - a huge chunk of a small pension pot.

Sadly, the alternatives are equally unsatisfactory. Earmarking, which allows a spouse to claim a portion of an ex-spouse's pension when he retires rather than at the point of divorce, simply hasn't worked.

The professionals believe that trading the retirement pot off against other assets will continue to be the most common form of sharing a pension. Mr Ellison says: "Few women will be terribly interested in a pension which starts many years ahead, if it means they no longer get to keep the house. The sad fact of the matter is that divorce normally entails financial hardship all round. People need cash. And they will always opt for cash today, rather than security in the future. That's human nature."