There are many advantages to the new “No-Fault” Divorce bill, introduced in April this year. Not only will it be easier to divorce, and without the acrimony of having to play the blame game, but there is also a set timetable which means getting a divorce finalised doesn’t have to drag on for months and months.
Unfortunately there are some issues, particularly involving the division of finances and pensions, which could cause some divorcing couples some problems.
Former Pensions Minister, Steve Webb, and family law barrister Rhys Taylor have said that the emphasis on speeding through the divorce process may undermine the effective sharing of pension wealth as the timescale doesn’t always allow for a full and accurate assessment.
It’s not uncommon for spouses to underestimate the value of their pensions or focus instead on more immediate issues like childcare and property, as well as immediate finances. The pair also argued that some couples may be tempted to sham divorce to abuse current tax laws.
The experts added that research suggests that divorced women in particular often have lower retirement pensions and expressed concerns that the new, speedier process may exacerbate the problem.
When it comes to dividing pensions, most couples take one of three options: an equal share and a clean break, provision for some of the pension to be paid to their former spouse on retirement, or offsetting the pensions’s value against other assets.
The New Rules
Prior to the new legislation coming into effect on April 6 a divorce would only be granted due to the “irretrievable breakdown” of the marriage; this could only be granted due to the “fault” of one party (such as having an affair) or the fact that the couple had been living separated for at least two years.
The system is now such that no party needs to blame or be blamed for the relationship breakdown and a divorce can be granted in just six months.
One spouse can now file for divorce using an online form and inform their partner within 28 days by email as well as a copy of that email by post.
After that filing, the spouse can apply for a conditional order (formerly the “decree nisi”) after 20 weeks, followed by the final order (“decree absolute”) 26 weeks later.
As long as the correct procedures have been followed, the other partner cannot contest the divorce.
Arranging things like financial settlements and childcare are handled separately, and the government is putting particular empahsis on the use of family mediation to help couples unable to reach agreements. Regardless of the divorce process, the courts insist that couples at least attend a MIAM (Mediation Information and Assessment Meeting) to see if mediation will be appropriate before allowing separating couples to puetition the family court to make a decision for them.
What Are The Financial Issues With No Fault Divorce?
According to the paper written by Webb and Taylor, the issues are as follows:
Underestimating The Potential Value Of A Pension
“Where one spouse has long service in a defined benefit pension scheme, these pension rights may be worth far more than the family home, but this point may not be well understood,” they say.
“Divorcing couples may be looking for a swift divorce, especially if attempts are being made not to escalate the temperature of poor relationships, and there may be little focus on areas such as pensions which can be complex and technical and require specialist knowledge.
“Especially where children are involved, the party with the lower level of pension wealth (usually the wife) may be more focused on other priorities such as somewhere to live and financial security and support for children and may be less focused on ensuring that pension wealth is properly included in any settlement.’
Late Notification Of Divorce Proceedings
The spouse who files for the divorce has 28 days to inform their partner of their intent, however in some cases that can severely reduce the time that person has to prepare for the proceedings.
“They may be dismayed to discover that there is little or nothing they can do to stop or delay the process if the other partner is insistent on going ahead.
“They will have to deal with a range of practical issues including care of any children, impact on living arrangements and short-term financial support post-divorce.
“They may also be reluctant to raise pension issues for fear of being seen to be ‘obstructive’ or ‘difficult’, in a new system designed to reduce conflict and the need to prove fault.”
The Email Issue
“The regulations around the new divorce process require service to a ‘usual’ email address, which might be a work email address.
“On a purely human level, for an individual to receive an email (possibly out of the blue) indicating that their spouse wishes to end their marriage could be very distressing, and this may be especially difficult to manage in a workplace environment if the usual email is a work email.
“Many work email accounts are not private and may routinely be read by other people, further reducing the privacy of the entire process.
“An employer may have a legal right to access an employee’s email account which could mean in some situations something which a party to the divorce wanted to keep entirely private could be known where they work.”
Abuse Of Pension Tax Relief
“Under current HMRC rules, each member of a couple can enjoy a lifetime allowance of £1,073,100 in pension saving whilst benefiting from pension tax relief.”
“But where one spouse has reached their lifetime limit and the other has not, there is no process to transfer unused LTA from one partner in a marriage to the other.
“In the event of a divorce, this situation can change. If pension rights are shared as part of the divorce settlement this will often mean that the spouse with the greater pension wealth transfers some of his or her pension to the spouse with less pension wealth.
“If the spouse with greater pension wealth was previously at the LTA, the situation postdivorce is that he or she now once more has capacity to save into a pension whilst benefiting from tax relief.
“Although current divorce law would in theory allow couples to “max out” on pension tax relief limits as described above, in practice there may be several practical barriers. The quickest way to secure a divorce would be for one party to allege that the other party is “at fault” for the divorce.
“This may not be a pleasant process, especially where children are involved, and it would be necessary for this to be proved to the satisfaction of the court.
“Alternatively, if an irretrievable breakdown is claimed with consent by both parties this could only happen after a two-year separation. In the new system these barriers are greatly reduced.
“One possible scenario is that a couple agree to divorce and “go through the motions” of demonstrating that their relationship has broken down.
“Pensions are then shared, only to be followed by an apparently remarkable reconciliation (and possibly even remarriage) a short period thereafter.
“Very large sums of tax may be dishonestly avoided in this scenario. This strategy is dishonest and may breach the criminal law. It may not, however, be easily detected, save by tipping off to the HMRC.’
Taylor and Webb are calling on the government to monitor the impact of the new divorce rules on the division of assets such as pensions and to do further research to ensure that an “already flawed system” doesn’t get worse.
They are also asking the Ministry of Justice to bear in mind the need to “nudge” couples about their pensions during divorce and to keep an eye on ‘divorcing’ couples who handle their own separation either through representing themselves in court or by avoiding the court system in its entirety.
“If there is evidence of seriously poor outcomes, [the MoJ] should review the case for the wider provision of legal aid in certain circumstances,” add Webb and Taylor.
Webb says: “One group currently at high risk of retirement poverty is divorced women. In large part this is because relatively little attention is often given at the time of divorce to a financial settlement which gives proper weight to pension wealth.
“It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions.
“Whilst there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions.”
Family law barrister Taylor says: “I very much welcome the new divorce law, but the family justice system needs to be astute to avoid the law of unintended consequences.
“So often pensions are the last thing anyone really wants to think about, especially on divorce. Care needs to be taken to ensure that the fair distribution of pension wealth on divorce is not overlooked in this brave new era.”
A spokesperson for the Ministry of Justice responded to the points saying: “This is not a new problem and, in fact, our changes give couples more time to resolve their issues and greater chance of doing so amicably.”
‘We have committed to further exploring financial provision, including pension sharing, once these changes are in force.’
Other Points Of View On The New Laws
Law Society president I. Stephanie Boyce said: “We are delighted that the divorce system – unchanged for more than 50 years – will finally be modernised to reflect the society we live in.
“This divorce reform will bring our marriage laws into the 21st century and ensure that, in the future, separating couples and their children do not suffer unnecessary conflict.”
Fiona Wood, partner at McAlister Family Law, agreed with Webb and Taylor’s concerns regarding pensions in finanical settlements and financial orders, adding they highlighted the complexity of such divorce cases.
“In most cases only those that can afford advice from a solicitor, when they divorce, understand what they are entitled to, particularly when it comes to pensions, and the court order needed to reflect that entitlement,” she said.
“Legal Aid is only available to a very limited few, so many wives, who are often the more financially vulnerable spouse, cannot afford legal advice.
“The new no fault divorce process does nothing to improve this
situation. Whether it makes the situation worse we will have to wait and see.”
How Can You Ensure Fair Division In Divorce?
Divorce is a highly emotional and stressful time and priorities are often set to the immediate future rather than looking at long term plans for things like pensions.
The best way to ensure a fair settlement is to seek independent financial and legal advice from the outset, either before or during family mediation or before a court hearing. Either way, it needs to be done before a settlement is agreed.
What Other Financial Issues Should Be Considered During A Divorce?
Sarah Coles, personal finance expert at Hargreaves Lansdown, has this to say:
“No-fault divorce could finally mean couples can break up without breaking the bank, but while there are some costs you should be able to cut under the new system, there are others you may not be able to do without.
“No-fault divorce enables one or both of you to apply for divorce, and there’s no need for any further blame. It means you can save money on needless legal arguments over who was at fault, and focus on coming to sensible agreements about things like care of the children and your finances.
“It also means you may stand a better chance of remaining on good enough terms to agree as much as possible between you, which will help cut the costs of divorce. You could also consider mediation. If you have a reasonably good, and equal, relationship with your ex.
“This brings you together in a room with a single lawyer to thrash out an agreement, which can cut the costs dramatically. Help you may still need.’
That said, Coles stressed that even in the most amicable split, it makes sense to get professional help if you have children, pensions, property, or significant savings or investments together.
“If your spouse has been building up a pension for years, pension specialists are particularly valuable,” says Coles
“You should get a pension valuation as part of the financial disclosure, and it may be worth paying an adviser to check the numbers.
“They can also help you pick the most appropriate way to share the pension – whether one person keeps it and trades it against other assets; you split the pension pot into two today; or you agree to share it when it’s being paid out.”
One of the biggest ways to cut costs during a divorce is to avoid calls to your solicitor as far as possible.
“An awful lot of people spend a fortune on calls to their lawyer, which end up being more about the emotional fallout than legal issues,” she concludes.
“If you need emotional support, it’s far better to get help from a qualified professional, like a counsellor. Otherwise you risk wasting a fortune on someone with an enormous hourly rate who is unqualified to help with this side of things.”
