Speedy ‘no fault’ divorces could make splitting financial assets like pensions fairly more challenging, experts warn.
Couples will be able to get divorced within six months of first applying even if one partner is opposed, and the process will be largely online – including the serving of divorce papers by email – from next month.
Financial settlements will still be dealt with in a separate and parallel process which can continue after the divorce is final.
Reforms from April: Spouses will be able to file for a divorce by email and complete the process in six months – but financial settlements might still take longer
But the new emphasis on haste could undermine the effective sharing of pension wealth at divorce, according to former Pensions Minister Steve Webb and family law barrister Rhys Taylor.
Divorcing spouses may under-estimate the value of pensions, or prioritise issues like childcare, property and more immediate financial security – and some couples might be tempted to sham a divorce to abuse tax rules, they argue jointly here.
The top pension and legal experts point out that financial orders are only made in around one in three divorces, and not all of these orders cover pensions.
They add that research indicates divorced women in particular often end up with very low pensions in retirement, and are concerned the new process could make matters worse.
There are three main options when dealing with pensions in a divorce – sharing them on a clean break basis, one partner earmarking some of the income to be paid to an ex-spouse after retirement, and offsetting their value against other assets.
We look at how the divorce law is going to change in April, the potential pitfalls for couples when it comes to splitting financial assets and other issues, and the views of lawyers and financial experts below.
How will getting divorced change?
Under the current law, divorces are only granted if there is an ‘irretrievable breakdown’ of a marriage.
Splitting pensions fairly in a divorce
A free jargon-busting guide launched by a legal charity helps couples divide one of their most valuable assets. Find out more here.
Either one spouse has to allege ‘fault’ by the other – like adultery – or provided both parties agree, the couple has to separate for at least two years to show sufficient evidence the split is serious.
From April 6, couples can get a ‘no fault’ divorce within six months. One spouse can file, then has 28 days to notify their partner, by email by default plus via a printed confirmation of the email by post.
A conditional order for divorce, currently the ‘decree nisi’, can be applied for 20 weeks after the first filing, and a final order, currently the ‘decree absolute’, can be applied for after 26 weeks.
Divorces will proceed even if one partner is against, provided the right procedures have been followed.
Financial settlements will continue to be dealt with separately, and the Government is still looking at ways to reform this aspect of divorce.
What are the potential pitfalls for divorcing couples?
No fault divorces could cause the following issues, warn Steve Webb and Rhys Taylor.
Divorcing spouses may under-estimate the potential value of pension wealth
‘Where one spouse has long service in a defined denefit pension scheme, these pension rights may be worth far more than the family home, but this point may not be well understood,’ they say.
‘Divorcing couples may be looking for a swift divorce, especially if attempts are being made not to escalate the temperature of poor relationships, and there may be little focus on areas such as pensions which can be complex and technical and require specialist knowledge;
‘Especially where children are involved, the party with the lower level of pension wealth (usually the wife) may be more focused on other priorities such as somewhere to live and financial security and support for children and may be less focused on ensuring that pension wealth is properly included in any settlement.’
One spouse might only hear about the divorce just before the first divorce order
‘They may be dismayed to discover that there is little or nothing they can do to stop or delay the process if the other partner is insistent on going ahead.
‘They will have to deal with a range of practical issues including care of any children, impact on living arrangements and short-term financial support post-divorce.
‘They may also be reluctant to raise pension issues for fear of being seen to be “obstructive” or “difficult”, in a new system designed to reduce conflict and the need to prove fault.’
Email notifications could cause problems
‘The regulations around the new divorce process require service to a “usual” email address, which might be a work email address.
‘On a purely human level, for an individual to receive an email (possibly out of the blue) indicating that their spouse wishes to end their marriage could be very distressing, and this may be especially difficult to manage in a workplace environment if the usual email is a work email.
‘Many work email accounts are not private and may routinely be read by other people, further reducing the privacy of the entire process.
‘An employer may have a legal right to access an employee’s email account which could mean in some situations something which a party to the divorce wanted to keep entirely private could be known where they work.’
‘No fault’ divorces offer greater scope for abuse of pension tax relief
‘Under current HMRC rules, each member of a couple can enjoy a lifetime allowance of £1,073,100 in pension saving whilst benefiting from pension tax relief.
Should I fake a divorce with my wife so we can split my pension and avoid a tax bill, then remarry her?
This is Money columnist Steve Webb periodically receives messages about the viablility of doing this from readers.
Steve and lawyer Fiona Wood of McAlister Family Law jointly tackled a reader question about shamming a divorce to halve a pension and dodge tax here.
‘But where one spouse has reached their lifetime limit and the other has not, there is no process to transfer unused LTA from one partner in a marriage to the other.
‘In the event of a divorce, this situation can change. If pension rights are shared as part of the divorce settlement this will often mean that the spouse with the greater pension wealth transfers some of his or her pension to the spouse with less pension wealth.
‘If the spouse with greater pension wealth was previously at the LTA, the situation postdivorce is that he or she now once more has capacity to save into a pension whilst benefiting from tax relief.
‘Although current divorce law would in theory allow couples to “max out” on pension tax relief limits as described above, in practice there may be several practical barriers. The quickest way to secure a divorce would be for one party to allege that the other party is “at fault” for the divorce.
‘This may not be a pleasant process, especially where children are involved, and it would be necessary for this to be proved to the satisfaction of the court.
‘Alternatively, if an irretrievable breakdown is claimed with consent by both parties this could only happen after a two-year separation. In the new system these barriers are greatly reduced.
‘One possible scenario is that a couple agree to divorce and “go through the motions” of demonstrating that their relationship has broken down.
‘Pensions are then shared, only to be followed by an apparently remarkable reconciliation (and possibly even remarriage) a short period thereafter.
‘Very large sums of tax may be dishonestly avoided in this scenario. This strategy is dishonest and may breach the criminal law. It may not, however, be easily detected, save by tipping off to the HMRC.’
Former Pensions Minister Steve Webb, pictured left, is This is Money’s agony uncle, while Rhys Taylor, pictured right, has answered many reader questions for us on divorce
Webb and Taylor call on the Government to carry out more research and to monitor the impact of the new divorce rules on dividing assets like pensions, to remove the risk that an ‘already flawed system’ gets worse.
They are pressing the Ministry of Justice to keep in mind the need for effective prompts or ‘nudges’ on pensions, and to watch closely the outcomes where people handle their own divorce, either by representing themselves in court or not using the court system at all.
Pension and legal experts join forces
Former Pensions Minister Steve Webb is This is Money’s pensions agony uncle, and a partner at pension consultant LCP.
Rhys Taylor, a barrister at The 36 Group at Gray’s Inn in London who specialises in pensions on divorce, has answered many reader questions for This is Money
He is a member of The Pension Advisory Group which published a good practice guide for lawyers on splitting retirement savings fairly in divorces.
The PAG also helped charity Law for Life to produce the free guide for estranged couples needing to sort out their finances in divorce explained above.
‘If there is evidence of seriously poor outcomes, [the MoJ] should review the case for the wider provision of legal aid in certain circumstances,’ they add.
Webb says: ‘One group currently at high risk of retirement poverty is divorced women. In large part this is because relatively little attention is often given at the time of divorce to a financial settlement which gives proper weight to pension wealth.
‘It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions.
‘Whilst there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions.’
Taylor, a family law barrister says: ‘I very much welcome the new divorce law, but the family justice system needs to be astute to avoid the law of unintended consequences.
‘So often pensions are the last thing anyone really wants to think about, especially on divorce. Care needs to be taken to ensure that the fair distribution of pension wealth on divorce is not overlooked in this brave new era.’
In response to Webb and Taylor’s points regarding financial settlements, a Ministry of Justice spokesperson said: ‘This is not a new problem and, in fact, our changes give couples more time to resolve their issues and greater chance of doing so amicably.
‘We have committed to further exploring financial provision, including pension sharing, once these changes are in force.’
What does the Government say about the new divorce law
The Ministry of Justice gives the following rundown on how the reforms will work.
– The Divorce, Dissolution and Separation Act introduces a 20-week period between the initial petition stage and when the court grants the provisional decree of divorce (the ‘decree nisi’).
This will provide a meaningful period of reflection and the chance to turn back, or where divorce is inevitable, it will better enable couples to cooperate and make arrangements for the future.
– The Government made the decision to keep the Act focused on the core legal process of ending a marriage or civil partnership to ensure that any future change, including around financial provision, would be founded on the revised legal process.
– During the Act’s passage through Parliament the Government listened to concerns involving financial provisions and the fact that they can drive conflict.
We are committed to further exploring financial provision on divorce, including pension sharing, once the Act itself has commenced on April 6.
– Couples who wish to divorce can choose to agree about their affairs between themselves or where there is disagreement about how to divide money, property and pensions, the husband or wife may apply to the family court to resolve financial disputes.
The court will ultimately may make a financial order or orders setting out how the division of assets is to be carried out. The court has the power to redistribute pension resources between the parties.
– The court does not impose a ‘one-size fits all’ solution and any decision will be based on the individual circumstances of the case.
There is no set share of pensions on divorce and any decision to make an order for pension sharing will be taken in the context of the particular case.
What do lawyers say about new ‘no fault’ divorce?
‘We are delighted that the divorce system – unchanged for more than 50 years – will finally be modernised to reflect the society we live in,’ says Law Society president I. Stephanie Boyce.
‘”No fault” divorce will cut unnecessary conflict from the separation process – allowing couples to move on amicably.
I. Stephanie Boyce: ‘No fault divorce will cut unnecessary conflict from the separation process’
‘This divorce reform will bring our marriage laws into the 21st century and ensure that, in the future, separating couples and their children do not suffer unnecessary conflict.’
The Law Society declined to comment on the issues raised by Webb and Taylor.
Meanwhile, Fiona Wood, partner at McAlister Family Law, says their concerns highlight the complexity of the law regarding financial settlements on divorce, including pensions which are often a very valuable asset.
‘In most cases only those that can afford advice from a solicitor, when they divorce, understand what they are entitled to, particularly when it comes to pensions, and the court order needed to reflect that entitlement,’ she says.
‘Legal Aid is only available to a very limited few, so many wives, who are often the more financially vulnerable spouse, cannot afford legal advice.
‘The new no fault divorce process does nothing to improve this situation. Whether it makes the situation worse we will have to wait and see.’
What can you do to ensure pensions are divided fairly in a divorce?
Fiona Wood: ‘In most cases only those that can afford advice from a solicitor, when they divorce, understand what they are entitled to’
Pensions are often neglected in divorce settlements despite their value to both partners.
What happens to the shared home is typically prioritised, for immediate practical reasons, especially if a couple has children.
This is Money recently published a guide with tips on what to do and how to avoid the worst pitfalls when dividing pensions here.
This included the importance of getting financial advice, as well as legal advice, at the outset and not waiting until after a divorce settlement is agreed.
Here are links to other useful guides and features.
What practical financial issues should you consider in ‘no fault’ divorces?
‘No-fault divorce could finally mean couples can break up without breaking the bank,’ says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
‘But while there are some costs you should be able to cut under the new system, there are others you may not be able to do without.
‘No fault divorce enables one or both of you to apply for divorce, and there’s no need for any further blame. It means you can save money on needless legal arguments over who was at fault, and focus on coming to sensible agreements about things like care of the children and your finances.
‘It also means you may stand a better chance of remaining on good enough terms to agree as much as possible between you, which will help cut the costs of divorce. You could also consider mediation. If you have a reasonably good, and equal, relationship with your ex.
‘No-fault divorce could finally mean couples can break up without breaking the bank’
‘This brings you together in a room with a single lawyer to thrash out an agreement, which can cut the costs dramatically. Help you may still need.’
But Coles stresses that even if everything is perfectly amicable, you shouldn’t rule out getting help from professionals if you have children together, pensions, a property, or significant savings or investments.
In these cases, speaking to a lawyer and a financial adviser are the best ways to protect yourself from an expensive mistake, she says.
‘If your spouse has been building up a pension for years, pension specialists are particularly valuable. You should get a pension valuation as part of the financial disclosure, and it may be worth paying an adviser to check the numbers.
‘They can also help you pick the most appropriate way to share the pension – whether one person keeps it and trades it against other assets; you split the pension pot into two today; or you agree to share it when it’s being paid out.’
Coles also warns that one way to cut costs during a divorce is to avoid unnecessary phone calls to your lawyer.
‘An awful lot of people spend a fortune on calls to their lawyer, which end up being more about the emotional fallout than legal issues.
‘If you need emotional support, it’s far better to get help from a qualified professional, like a counsellor. Otherwise you risk wasting a fortune on someone with an enormous hourly rate who is unqualified to help with this side of things.’
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