The better halves who get the worst of it when romance dies

There's no pensions equality when mothers have to take a career break, so how do you ensure a fair financial split in a divorce? Nargis Ahmad and Julian Knight explain
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The Independent Online

January is the busiest time of year for people starting divorce proceedings, and this year the institution of marriage is under still greater stress from the credit crunch and the economic recession.

"New Year tends to be a catalyst if a marriage is going wrong, and one of them will decide that they want out," says David Lister, a partner at law firm Mishcon de Reya.

"And now there are added financial pressures. The credit crunch is putting a strain on marriages, with job uncertainty and big City bonuses that are no longer there."

Many British couples are getting poorer in terms of the assets they hold. Property prices have just had their worst year on record and share investment seems a one-way bet – downwards. And from this shrinking pot, women will tend to come off worst in a divorce, mainly because not enough weight is given to retirement savings and pensions.

It has been estimated that fewer than half of divorce settlements take full account of a couple's retirement provision, and women may suffer as a result because they have smaller pension pots, more often than not because their careers have been interrupted by having children. On average, according to government statistics, women retire on roughly half the income of men, when all pensions are taken into consideration.

"Women after divorce are poorer. They have much less in a pension fund than men, so it's important to get that into the settlement," says Imogen Clout, author of a divorce guide from the consumer group Which?. "People either don't want to rock the boat or they don't want to think about the time when they're 60. Women in their thirties and in their middle years don't worry about it enough and don't push for it. They then repent at leisure."

And women generally live longer, around five years, than men, so arguably their needs are greater. "If the man and wife are of the same age, the wife will need a greater percentage as the pension fund has to go longer," says Mr Lister.

Working out pension values can be complicated, especially given the different types available. Retirement funds in company schemes are calculated at their transfer value – the amount of money the pension would be worth if it was switched to another workplace scheme. Personal pensions are valued according to how much money is in the fund.

In terms of producing a more equit-able financial outcome for divorcing couples, there are a number of approaches. Offsetting allows one spouse to keep their pension while the other partner is granted a greater share of the family home. With earmarking, meanwhile, the court will allocate a certain proportion of one partner's pension to the other. The downside is that you will have to wait until your ex-partner retires, and if they decide to work longer, you will have to wait longer too. If they die before they reach retirement age, you may get nothing.

Another alternative is pension splitting. Following a change in the law in 2000, a spouse is now entitled to half of the main breadwinner's pension and they can move the money to another fund, giving both partners more direct control over their finances. This ruling was introduced to help the wife even if she remarried and to prevent her from losing out if the husband died or if she had to wait for him to retire. Sharing a pension can be helpful to women who have taken time out to raise a family, depriving themselves of some pension contributions.

But women who will be thinking about remarrying need to be careful, particularly as this can affect their state pension entitlement, explains Malcolm McLean, chief executive at the Pensions Advisory Service.

"If you remarry, take stock of what it will do to your rights. If you do so before state pension age, you will not be able to claim on your ex-husband's National Insurance contributions and will have to depend on your own," he says. "It also applies vice versa for ex-husbands who want to claim part of their former wife's state pension. When your next husband reaches retirement age, you will be entitled to 60per cent of your new husband's pension. This doesn't currently apply the other way round."

While splitting a pension may be an option that you want to take up, divorce can also lead to the carving- up of something else that you probably won't want – debts. Ms Clout explains: "Debts are treated the same as assets: whoever's name is on it has to sort it out. Often couples think, 'Let's pay it off out of the common money before dividing.' But if they have lived apart prior to divorcing and one of them is racking up new debt, then this more amicable arrangement may no longer be suitable."

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