BLOG: The pension disadvantage for female divorcees and how to plan for it
Money is one of the top reasons cited for marriage breakdowns in the UK.
However, part of the problem may be that couples just don’t speak about money – and don’t make financial plans together.
Instead it’s a topic that’s often ignored. Yet the very act of doing so can not only help to make your marriage last but will also ensure you are well prepared should the worst thing happen and your marriage breaks down.
In the UK, women currently retire with one-fifth of the pension wealth of men and are likely to be even further disadvantaged if they get divorced.
Research from Scottish Widows found that 40% of women stated that their retirement prospects worsened because of divorce. This could be because women are, understandably, preparing for a joint retirement with their spouse. Or that they might not be fully involved in the financial decisions being made with regard to retirement planning over the course of their working lives.
With a rising number of those older than 65 getting divorced, your best-laid plans could fall apart when it matters most. By discussing as a couple your short-, medium- and long-term goals and how you will reach them, you will be better informed for all eventualities.
Here are some top tips from St James’s Place on how to prepare for the worst case scenario.
1) Put a pension sharing order in place
If the worst were to happen, during divorce settlement negotiations you will be asked to make a list of all of your individual and joint assets and liabilities. It’s not compulsory to split pensions, and some settlements leave the pension out of the arrangement entirely.
This means you might be at risk if you’ve not built up your own pension entitlement over the years because you’ve taken time out of work to raise children while your spouse works, for example.
Pension sharing orders – a way of legally dividing up a pension after a divorce – are now more commonplace; however, married people are still not prioritising pensions when working out a fair and equitable deal for both parties.
It’s usually the jointly owned home that takes precedence which is understandable if your children are still living at home. If you are a mother, your children and a roof over your head is likely to be your most pressing concern.
Why not sit down as a couple now and ensure that you have a full list of all individual and joint assets, including any properties that you own, business holdings or trusts, and pension and other retirement savings. If nothing else, you will be speaking about money together and building a picture of how financially secure you are for the longer term.
2) Speak with your spouse about topping up your pension
Focused retirement planning will also help you to mitigate the fact that, as a woman, you are likely to be worse off in retirement than a man.
The gender pay gap means that women often earn less, so you might not be contributing as much to your workplace pension as your spouse does to his. Discuss with your spouse whether topping up your pension fits into your family’s budget and overall financial plan.
If so, you can speak to your employer about contributing more – and whether they will match it. This will help to improve your pension wealth, even if your earnings are lower.
If you’ve taken the responsibility for childcare, this can also affect your level of pension contributions. Your spouse can top up your pension by contributing to your pension on your behalf.
There may be Income Tax advantages for your spouse if they do this, and it could help you make up lost ground as you save for retirement.
If you give up work entirely to look after your children or elderly relatives, you will not be paying into a workplace pension and will miss out on National Insurance Contributions if you are not claiming benefits.
It may be that your reduced family income means that you will become eligible for Child Benefit. Even if your family income is above the £50,000 Child Benefit threshold, it is still important to claim this benefit, as it will ensure that you do not miss out on National Insurance credits and protect your State Pension entitlement.
3) Seek expert advice early to secure your future
For many women, the first time they meet with a financial adviser is upon divorce or the death of a spouse. By seeking financial advice now, you can ensure that as a couple and individually you can look forward to a secure retirement and hopefully a long and happy marriage.
Sharon Bonfield is commercial research specialist at St James’s Place Wealth Management