Lawyers forget pensions in divorce deals leaving women out of pocket

When Joanne Lewis walked away from her divorce with £62,000 in 2014, she thought her lawyer had made a good deal.

But she should have made nearly £500,000 out of the split, as it turned out. The 58-year-old had not received anything from her ex-husband’s generous police pension because her lawyer had not taken it into account in the negotiations. It meant that she had received just over a tenth of the amount she was entitled to.

Last month, Joanne, who works as a benefit visitor in Braintree, Essex, won a four-year battle against her lawyer. The High Court ordered the company to pay her £400,000 to account for the money she should have received.

Joanne is just one of thousands of women getting a rough deal as a result of lawyers’ shoddy divorce settlements, experts warn. Tony Derbyshire, of Divorce Lifeline, who handled Joanne’s case, says lawyers routinely fail to accurately calculate pensions — or forget about them altogether — during the divorce process.

Over the past ten years, Divorce has helped Lifeline recover more than £4 million for divorced women whose lawyers failed to understand the implications of work and personal pensions.

Derbyshire, which handles 200 cases of aggrieved divorces a month, warns that many lawyers misjudge the amount of a pension.

And record numbers could go awry this year as couples increasingly opt for DIY divorces. New no-fault divorce laws introduced a year ago have made breaking up easier and faster, with many couples not even having to hire a lawyer.

George Mathieson, from pensions expert Mathieson Consulting, who acts as an expert witness for lawyers, says: ‘Even when experienced lawyers deal with pensions, they don’t always understand the true value, which is why people end up with an unfair settlement. The risk is even greater if people try to achieve an amicable divorce.’

Pensions are often the second largest marital asset after property, making up 42 percent of household wealth, according to the Office for National Statistics. But Vanessa Lloyd Platt, of divorce lawyer Lloyd Platt & Co, says seven in 10 couples she deals with don’t factor in pensions at all and those who do are likely to have the valuation wrong.

Only 22 per cent of divorces in England and Wales in the first nine months of 2022 included an application for a pension division order, the Justice Department said in response to a freedom of information request from Nockolds’ lawyers.

Lloyd Platt: ‘Valuing pensions is where things most often go wrong, even if you have a lawyer involved. In an extreme case I saw, a woman came to us after her amicable divorce. Her lawyer hadn’t asked about pensions and she never received a penny from her ex-husband’s £1.2 million pension. She realized it too late and couldn’t afford to challenge it by suing her lawyer.”

There are three ways courts divide pensions in a divorce. The first is known as ‘pension sharing’, where pension savings are split directly. This is the most common way to reach a settlement.

The second option is called ‘pension balance’, where the value of the pension is offset against other assets of comparable value.

The last method is called ‘pension earmarking’ or ‘attachment’. The income is divided between ex-spouses once the pensioner begins to draw on his fund.

During the divorce process, the legal termination of the marriage does not end the financial claims that spouses can make. It is not until a financial divorce settlement is reached and a court order is issued that the assets are divided. This is a legally binding agreement that governs how you divide money and assets. Until a court order is obtained, ex-spouses can continue to file financial claims for years after the divorce.

Once a warrant has been issued, it is rare that divorcees can reopen a settlement. But it is possible, for example, if circumstances change shortly after the warrant is issued or if it appears that a spouse has wrongfully withheld information. Matthew Taylor, of Stowe Family Law attorney, says the majority of women are left with a bad deal because they usually choose to take the house with them and let their ex-husband keep the pension.

Taylor says, “Don’t sell yourself with the river – pensions can be worth a lot more than the family home. In many cases, people agree to leave a £100,000 pension with the husband, while the wife takes in an extra £100,000. But that’s comparing apples and oranges, because the pension can be worth much more than it seems.’

That’s because generous defined benefit pensions pay a guaranteed income from the day you retire until your death. They also increase each year with inflation or by a fixed amount, meaning your purchasing power is protected.

Gold-plated pensions are given to anyone who works in the public sector, for example teachers, civil servants or the NHS. These types of pensions were also offered by private sector employers in the past, but today the majority of employees save for a defined contribution pension.

This is a simple pot of money that is invested in the stock market and is available to the saver upon retirement.

It is much easier to split these types of pensions, because you can split the nest egg in half and everyone is left with a lump sum pension. This is in contrast to defined benefit pensions, where it is more difficult to assess the value of the guaranteed income for life.

In one case involving Taylor, the husband’s pension appeared to be worth £750,000 if he collected it today. But upon further investigation, Taylor discovered that it was in fact worth a whopping £1.6 million.

‘It was overwhelming. No one would ever have known. The courts would have approved the pension distribution decision if we hadn’t looked at it more closely,” he says.

To reach this figure, instead of calculating how much you can cash out of a pension today, assess how much you would need to buy an annuity that would pay the same guaranteed income when you retire. This can be up to 60 percent more than the cash value.

Taylor’s client was willing to settle for £375,000 but tore up earlier agreements when she saw she was entitled to nearly £800,000.

Do-it-yourself divorces have exploded in popularity, while pension splits have fallen due to last year’s legal reforms.

But critics say do-it-yourself divorces increase the risk of ex-spouses being left with unfair deals they can’t renegotiate. More than 133,000 couples who have filed for a no-fault divorce in the past year have taken this extra risk, wealth manager Quilter warns.

Jon Greer, from Quilter, says: ‘Breaking up a relationship is not an easy time for anyone and no-fault divorces are an attractive option. However, deciding how to split your wealth can be a challenge, especially for couples who have chosen to go it alone.”