Take the house... or pension? The decision that faces many divorcing couples - and the wrong choice could be extremely costly

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Divorcees are facing hardship in retirement by picking property over pensions, experts warn today.

Family law experts and financial advisers have told Money Mail that women are often too quick to accept the family home in a divorce settlement, overlooking the value of pension wealth.

But advisers and solicitors also say an increasing number of women are now the family breadwinners, so must pay up in divorce.

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The latest figures show there were 107,599 divorces between men and women in 2019 — up 18.4 per cent from 90,871 the year before. 

The rise is partly down to a backlog of casework being cleared, the Office for National Statistics said.

An academic study this month found that many married men have considerably more pension wealth than their wives. Lots of women sacrifice work to raise children and also spend money on childcare. 

But pensions are not always straightforward pots of money that can easily be divided. Instead, defined-benefit or final-salary schemes come with valuable guarantees and benefits that can be vital to a stable retirement.

So how can you avoid being short-changed?

Husbands tend to have more saved up 

Researchers from Manchester University and the Pensions Policy Institute analysed the pension wealth of nearly 30,000 people over 30. 

The study found that married men aged 45 to 54 had an average pension wealth of £86,000, compared with £40,000 for women, while men aged 55 to 64 had £185,000 and women the same age just £55,800.

Yet married men aged 65 to 69 had pension money worth more than £260,000 on average, compared with just £28,000 for married women.

The research also revealed that in half of couples with retirement savings, one partner has more than 90 per cent of the pension wealth. Less than 15 per cent of couples had roughly equal pensions.

The researchers said better sharing of pensions in divorce cases could have a ‘considerable positive impact’ on women’s finances in later life.

Tim Pike, from the Pensions Policy Institute, says: ‘All of these people could, in theory, distribute their pension assets in a fair way on divorce, yet the research found no evidence to suggest this was happening. 

‘Divorced women have very little pension and significantly less than married women.’

Beth Kirkland, of the charity Law for Life, adds: ‘Many divorcing couples leave out their pensions when they decide how to divide their money and property, particularly if they can’t afford a solicitor. But this can be a huge mistake.’

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A bad deal can ruin retirement 

After illness, divorce is the second biggest cause of retirement plans going wrong, according to Interactive Investor.

The investment firm’s survey of 12,000 people found that less than half of divorced retirees had discussed pensions when they separated. 

Half of men said they discussed pensions, compared with fewer than one woman in three.

Becky O’Connor, head of pensions and savings at Interactive Investor, says: ‘There remains countless examples of divorce settlements that leave one partner, usually the woman, worse off in retirement.

‘This is partly down to lack of understanding of the value of a pension, but also a lack of awareness of rights to a spouse’s pension on divorce, as well as greater emotional attachment to the family home rather than the pension.

‘We often hear of cases where women choose the property and let their husband keep the pension.’

But she says this isn’t likely to be the best decision — especially as women don’t typically have the same level of private pension wealth as men and also have fewer state pension qualifying years.

Divorce cost me more than £1.5m 

Susan Riley* says she had to pay up more than £1.5 million when her 12-year marriage ended in divorce.

The marketing professional was earning a six-figure salary and had a £1.5 million home in North London when she got married in 2004.

But the judge ruled that, as well as her home, her former husband was entitled to half of the value of the office where she ran her advertising business, and a £1.5 million property she rented out to save for her pension. 

Susan says she stopped contributing to her private pension when she bought the investment property. 

She adds: ‘We were just told to keep our pensions but that didn’t include my pension property.’

The five-year divorce battle also ended up costing both her and her ex-husband some £700,000 in legal fees. Susan, who is in her 50s, has since had to move out of London to a smaller property. 

She says: ‘It seems ridiculous that there is no legal protection for wealth you have accumulated before you met your spouse.’

* Name has been changed.

Pension versus property? 

Maike Currie, director at Fidelity International, says: ‘It’s no surprise that in the middle of making custody arrangements and dividing up other assets, pensions can fall to the bottom of the list. 

‘But after property, the second largest financial asset for many households is often the pension fund — and it is vital to ensuring that both parties have savings for later life.’

She says it is common for the main pension-holder and breadwinner to retain most of this wealth, while the ex-spouse may receive a one-off lump sum or the matrimonial home.

But she says: ‘Substituting a regular pension income for a house may not be the wisest move, given the volatility of property prices and forgoing a pension income for life.’

Amy Pethers, a financial planner at wealth manager Brewin Dolphin, says that as a house is not a liquid asset, women cannot rely on one as a source of income — and a property can have high running costs.

She points out that house prices are not certain to rise, while pensions are likely to benefit from steady growth and compound interest.

She also says pensions are not considered part of a person’s estate and so don’t qualify for inheritance tax.

If a divorcee were to keep the family home worth £600,000 while her ex-husband kept his pension worth £600,000, she might well have to sell up when she wanted to retire.

His pension could pay an income of £20,000 a year with an annuity. But even if she managed to buy a home for £200,000, the remaining £400,000 would only buy an annuity paying £13,325 a year, at today’s rates.

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How best do you split up a pot?

Gemma Hope, a specialist solicitor and director at Family Law Partners, says pensions are considered a joint asset by the courts.

She explains: ‘This is considered fair, as a spouse who has stayed at home to look after the children, enabling the other spouse to build up their career (and pension fund), will often have done so at the expense of their own career and ability to build up a pension.’ 

Fidelity’s Mrs Currie says there are two ways to divide a pension. ‘Earmarking’ means a proportion of the benefits are later paid directly to the former spouse. 

This means that you could have a guaranteed retirement income until you die — but you will only get the money when the pension-holder decides to start taking it. So if they never take it, you will miss out.

The second way is to value the pension and divide it. Ms Currie adds: ‘This gives both parties a clean break, whereby each receives their share of the pot, without the need for further negotiations.’

Former family solicitor Josephine Fay says that divorcing women could lose out if they don’t take financial advice, especially about dividing pensions.

Miss Fay, now head of professional services at Brewin Dolphin, says difficulties are likely to arise if the pensions involved are complicated, such as final-salary deals with valuable benefits attached.

She adds: ‘Historically, women have tended to invest less in pensions throughout their careers, so it is crucial that they obtain proper financial advice to understand the long-term implications of balancing pension assets with property and other assets.’

Break-up ruined ruined my finances

When Sarah Walker* and her former husband separated after 13 years of marriage, they were quick to agree on how they would share custody of their children.

But the battle over their finances would take two years and cost hundreds of thousands of pounds in legal fees.

Sarah, 47, says she sold her two-bedroom flat and contributed to repaying her ex-husband’s mortgage on a four-bedroom family home in South-West London.

Yet in the settlement, she received just 20 per cent of the value of the property, which is now worth more than £1 million. 

And she says her ex did not have a private pension, while hers was too small to worry about.

Sarah, who works in advertising, says: ‘The divorce has absolutely decimated my financial life and I was forced to spend my mother’s inheritance on legal fees.

‘It doesn’t feel right to be awarded so little when my flat could have risen in value so much if I hadn’t sold it.’

* Name has been changed.

More female breadwinners 

Rising numbers of wealthy women are having to cough up in divorce settlements, advisers and lawyers have told Money Mail.

Miss Pethers, of Brewin Dolphin, says she has seen more female clients having to pay their former husbands in divorce settlements. 

‘A client of mine had to give her house and all her liquid assets to her husband after a recent financial remedy court case,’ she says. ‘This is becoming more and more common.’

Miss Pethers has also seen an increase in women who have more assets than their husbands: ‘More women are building up solid asset bases before they get married, so they may have more at risk in divorce cases than they have in the past.’

Alex Davies, head of family law at Cripps Pemberton Greenish, says more young, wealthy women are wanting prenuptial agreements.

He says: ‘We are seeing at least a 50 per cent rise in the number of prenuptial agreements we are asked to prepare for wealthy young women. Although much of that is inherited wealth, our clients seem to want to keep this for security against the effects of a costly divorce.

‘It is common for them to actively manage their own inheritance, rather than rely on investment decisions made by their husband or wider family. They also often want to maintain their independence by pursuing their own careers.’

Ms Currie, of Fidelity, says research from her firm showed that more than a third of women were now the main breadwinner in their household. The figure rises to 43 per cent in those aged 18 to 34.

But she says: ‘While more women may be bringing home a bigger proportion of the household income, this isn’t always reflected in other assets, such as pensions or investments.

‘Time spent out of the workforce or money diverted towards costs such as childcare or everyday living expenses could mean women have less saved overall.

‘This is why it is incredibly important to be on top of all the assets couples hold, from salary and mortgage payments right through other assets including all pension savings.’

Brewin Dolphin’s Miss Pethers says that getting a prenuptial agreement in place, especially if you have a property that you owned independently before getting married, is the best way to protect your assets. She adds: ‘It’s obviously not foolproof but it’s a step in the right direction.’

Prenuptial agreements are not strictly legally binding in England and Wales. Yet a court will likely uphold one if it is not unfair to either party. 

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