FOOL SCHOOL
Divorcing A Pension

October 28, 2002

By Jane Mack (TMFJane)

If you're contemplating, or are facing the prospect of divorcing a nice fat pension fund, you now have another option when it comes to splitting the communal assets. In December 2000 the Welfare Reforms and Pensions Act 1999 -- the long-awaited pension sharing law giving greater flexibility to divorcing couples -- finally landed on the statute books. (So it takes a year for these things to come into effect, but that's how governments work, OK?)

If you don't have much of a pension scheme in operation for your own needs (and it's usually older, married women who don't), because you've spent years at home bringing up children, it could have a profound effect on your retirement income.

So what's new?

Let's say your husband has been contributing to a decent company pension scheme for the last 20 or 30 years. He's built up a pretty significant fund, which means that, when he finally decides to consign his briefcase to the attic on retirement, you and he can look forward to a jolly comfortable lifestyle. And let's say you've not earned very much during those last 20 or 30 years of the marriage -- mainly because you've been at home bringing up the children, and have only been in a position to take the occasional job every now and then.

So, you have no real pension scheme in place. But, hey, that's okay, your husband's got one.

Suddenly he wants a divorce -- or you do! What happens?

Pension schemes have long been considered part and parcel of "matrimonial property" on divorce but, in the past, whenever a court has had to consider how to divvy up between the divorcing parties, it has been very restricted in its powers. Until the new law came into effect there were only two options (pension-wise) when looking at all the available marital assets, and these were:

• Allowing the pension holder to keep the pension fund, but transferring a greater share of other assets to the "outgoing" partner (e.g. the matrimonial home), to make up for the loss of access to a pension, or
• Earmarking part of the pension fund for the exiting partner's benefit, so that some of the eventual payout will flow her way the moment he starts claiming from it.

In this situation, of course, the first option means the ex-wife has nothing to live on when she reaches retirement age (apart from state benefits). And the second option means she has to wait until her ex-husband decides to retire before she can take her share of his pension income (and if he drops dead before he does so, she gets absolutely nothing at all!).

What happens now?

Now, the "pensionless" spouse has the option of physically taking a chunk of money from her ex-husband's pension fund, so she can put the lump sum into a scheme of her own -- if that's how she wants to play it.

This is a Good Thing.

Access to your husband's chubby pension fund, when you're in "Bye, Bye, Hubby" mood, has usually been one of those "untouchable" assets on divorce. Realistically, you had to take something else instead to be sure of your independence. Consequently, the system has been rather unfavourable to women, who have often been left high and dry with no real means of supporting themselves once they reached pensionable age.

But now, women who are divorcing have another option. And it's a useful option, particularly if they're nearing retirement age when their world happens to fall apart.

The new law won't result in a larger settlement for either side on divorce, but it does mean that couples now have a real choice about how to divide their marital property. The value of a husband's pension fund isn't just a (virtually) intangible asset anymore -- women can actually walk away with some of it. It means women now have more control when it comes to choosing how they want to split what's available. Hurrah!

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