Serious Money

October 29, 2010 6:16 pm

Before you split, think of the pension

C ourts in the UK are apparently expecting a rush on pre-nups after last week’s landmark decision to uphold one made by Katrin Radmacher, the German heiress. The thought that pre-nups might now be legally binding is expected to encourage the wealthy to flood into such arrangements to protect existing assets and investments when they get married. It would seem that far less attention is paid to existing assets and investments on divorce, however.

New figures from Scottish Widows show that in divorce cases, 71 per cent of people did not consider their spouse’s pension rights as an asset to be divided in the spoils.

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These people might be getting fairly questionable legal advice – the courts are now required to consider the pension assets in any settlement.

What is more likely is that pension rights are easily given up in favour of something more tangible, such as cash or property. Janet Brown, a partner at law firm Sackers, who deals with a lot of pension sharing cases, thinks that people have more of an emotional attachment to the house they live in and are therefore prepared to offset pension benefits against the value of a house.

But this misunderstands how valuable a pension is. It is pretty hard to calculate the present value of a pension, particularly if someone is in a final salary scheme. If you just look at the capital value now, this ignores all the future growth. Some people are allowed to share in the benefits when the spouse starts to draw the pension at retirement, but this can get messy, particularly if people want a clean break.

Pension experts believe that divorce lawyers are unlikely to realise the true value of the pension as it can be so complicated.

“There’s a tendency to take a fairly simplistic approach to the pension, very often because the divorce lawyers do not understand the complexities,” argues Tom McPhail, an adviser at Hargreaves Lansdown.

He believes that if there are significant rights to pensions involved, it makes sense to bring in a pensions expert.

I’m not saying all this to encourage people going through a divorce to fleece their partner for everything they have – more to point out how little awareness there is of pension benefits.

Younger couples in particular are less likely to care about the pension in a divorce, Brown says, because they are far more concerned about having a cash deposit to get on the housing market.

People under the age of 30 are notoriously unbothered about their retirement plans, which is understandable.

But they should give some thought to what they’ll get in retirement if they haven’t saved anything – the government this week said it is considering raising state pension benefits to £140 a week, up from £132.60 at the moment if you include pension credit. A rise is a good thing of course – particularly as the flat rate will benefit women who often aren’t eligible for the full state pension as they haven’t worked enough years to qualify because they were having children. But £140 a week – £7,280 a year – is still not much.

And people are saving less, not more. Figures this week from HM Revenue and Customs showed that people saved nearly £1bn less into their personal pensions in 2009/10 than they did the year before – which was already £1bn less than they did in 2007/08 (£16.4bn in total). In an economic downturn, pension savings tend to be the first to go. Of course, some people argue that pensions aren’t worth the hassle. They may not think the stock market is a great place to be for the long-term: the “lost decade” of 2000-2010 when equity markets were pretty much flat has put a lot of investors off equities altogether. Others don’t like the fact that you can’t access your pension until 55 and that further changes affecting pensions might be introduced.

Many plan to rely on their property in retirement instead, perhaps with a view to selling it and downsizing, or to releasing equity from it and taking out a lifetime mortgage. But that is to assume the price of their house will have gone up significantly by the time they retire, which is by no means a sure thing.

Moreover, it is bad investment practice not to spread your risk and invest among different assets, so-called “asset allocation” that private bankers are talking about more and more in the wake of the credit crunch. Investors are being urged to ensure their portfolios are exposed to property, equities, bonds, cash, gold and, for the wealthy, tax-efficient products such as venture capital trusts or offshore bonds.

And the tax relief on pensions is still hard to ignore. Not having to pay income tax on any investment, even given the new £50,000 a year limit on pension contributions with tax relief, is a bit of a no-brainer. Save properly into a pension and it could even be worth protecting with a pre-nup.
alice.ross@ft.com

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