In England and Wales there has been a significant drop in the number of divorcees being forced to share their pensions in recent years. Is there an explanation for this downward trend and if so, is this also happening in Scotland? Does this give cause for concern?
Pensions can be incredibly valuable assets which are often ignored or overlooked by couples who have separated and are heading for divorce. Experience tells us this has been the case for many years in Scotland particularly when one or both spouses fail to obtain legal advice. Many of those who have little, or no pension benefits fail to grasp their importance on divorce and that they could be leaving themselves short in the future.
A financially dangerous trend?
According to financial adviser, Tim Holmes of Salisbury House Wealth, nearly six in 10 divorces in England and Wales have been completed on a DIY basis. Mr Holmes warned that it was financially dangerous to leave pensions untouched during a split, particularly when couples divorce without legal experts. With no comparable statistics about the number of those divorcing on a DIY basis in Scotland the increase in financial pressure and lack of understanding about the availability of legal advice as a result of the pandemic, may have led to an increase in the number of people dealing with divorce themselves.
Offsetting pensions on divorce
The importance of a pension in a divorce is not always about sharing the pension itself. In a Scottish divorce, the focus is on the sharing of the fruits of the marriage. The accrual of pension benefits form part of this exercise. Obtaining valuations of pensions can vastly change the value of assets to be considered as part of this exercise. When the pensions involved are final salary (defined benefit) pension schemes they can be more valuable than the family home.
Divorcing couples can offset the value of a pension against other assets belonging to them when sharing matrimonial property between them. The thing that puts people off wanting to consider pensions as part of their separation is that they are often misunderstood, or people don't know what can be done with a pension.
How to pension share on divorce
As well as offsetting the value of a pension on divorce, a couple can also agree to share the value of a pension.
Pension sharing can be done by agreement (where the couple enter into a formal written agreement prior to divorce) or, if necessary, by court order. There are a strict set of rules on the form of the agreement to be entered if sharing in a pension. There are also stringent time limits for what needs to be done before and after an agreement providing a pension share has been entered.
Lots of couples don't appreciate that a pension share cannot take effect until after they are divorced. As a result, the pension share agreement needs to include various fail-safe provisions to ensure that the pension share can take effect, and if it doesn't, both sides are protected.
In Scotland, final means final
While in England and Wales it may be possible to challenge a financial settlement in court years after the divorce has been finalised, the same is not the case in Scotland. If it can be shown that one party deliberately concealed a pension valuation or provided a false valuation prior to or on divorce, the agreement could be set aside. However, that application would need to be made before the couple are divorced from one another.
Given the apparent difference in the law in Scotland, couples who are divorcing here should be wary of finalising agreement between them without first seeking advice. For the most part, couples are encouraged to have a constructive discussion between them on matters concerning their relationship breakdown. However, some preliminary advice is sensible and expert input is crucial when it comes to putting what has been agreed down on paper.