Divorcing spouses risk losing out on up to £665,000 in pension savings by failing to include retirement funds in their settlement discussions, new research has revealed. Calculations by an interactive investor show how overlooking pension arrangements during proceedings could result in significant financial losses for separating couples.
The findings demonstrate that a £200,000 pension pot could grow to nearly £665,000 over 28 years with an annual growth rate of seven per cent. Analysts warn that many couples prioritise other assets, such as the family home, while neglecting to address pension arrangements during divorce settlements.
“The process of untangling two lives is rarely straightforward and often brings emotional and financial challenges,” explained Myron Jobson, a senior personal finance analyst at interactive investor.
Research indicates that the majority of divorcing couples don’t even discuss pensions during proceedings, potentially leaving one partner significantly worse off in retirement. The calculations assume retirement at age 68, in line with the state pension age for those born after April 6, 1978.
Starting with an initial pension value of £100,000 at age 40, a spouse could miss out on £196,000 if the pension is excluded from divorce settlements, based on a five per cent annual growth rate. This figure increases significantly when higher growth rates are considered.
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Couples could face losing more than £600k in retirement savings GETTYAt seven per cent annual growth, the same £100,000 pension could grow to over £332,000 over the 28-year period. The impact becomes even more dramatic with larger initial pension values. A £200,000 starting pension could reach £392,000 with five per cent annual growth over the same timeframe.
These calculations assume a pension-sharing arrangement where the pot is split 50-50 between the divorcing couple.
The figures highlight how compound growth over nearly three decades can substantially increase the value of pension assets.
Jobson highlighted how pensions are frequently overlooked during divorce proceedings. “Pensions are widely underestimated, and our research reveals that the majority of divorcing couples don’t even discuss them,” he explained.
Couples in the midst of divorce proceedings are being reminded to factor in their pensions to any final settlement
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Based on the interactive investor’s research, this oversight particularly affects women, who risk missing out on future income that should rightfully be theirs. Jobson points to several factors behind this trend, including the emotional burden of divorce and misconceptions about asset priorities.
“While no one enters a marriage expecting a divorce, understanding your household finances is crucial,” said Jobson. He cited that this knowledge provides clarity on entitlements during a breakup and helps couples make informed financial decisions throughout their relationship.
The power of compound interest plays a crucial role in pension growth over extended period, the analyst claimed. A pension left invested benefits from growth not only on original contributions but also on previous returns.
This “turbocharging” effect significantly increases the overall value of pension pots over time. For example, a £100,000 pension at age 40 could grow to £196,000 by age 68, assuming a five per cent annual growth rate.
The same initial pension could reach £332,000 with a seven per cent annual growth rate over the 28-year period. These calculations demonstrate how excluding pensions from divorce settlements could leave one spouse at a significant financial disadvantage.
The compounding effect becomes even more pronounced with larger initial pension values. A £200,000 starting pension demonstrates this dramatically, potentially reaching £665,000 after 28 years of seven per cent annual growth.
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Divorcees are at risk of taking a significant hit in retirement
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There are three main approaches available when dividing pensions during divorce proceedings. Pension sharing offers the most direct solution, where the pension is split between both parties through a court order.
This creates a separate pension pot for the ex-spouse, providing them with independent control and ensuring a clean financial break. Pension Attachment Orders allow one party to receive a share of pension benefits when their ex-spouse starts drawing their pension.
However, these payments cease if the receiving spouse remarries or if the pension-holder dies. The third option, pension offsetting, involves trading the pension value against other assets. This might mean one spouse keeps the pension while the other receives a larger share of the property.
While pension offsetting provides a clean break, achieving a fair balance can be challenging. This approach could leave one party with insufficient pension provisions for their retirement.