By David James
In May 2013, the Pensions Bill was introduced into the House of Commons. This set out proposed changes to the state pension.
The main impact of the Bill related to the introduction of a single tier state pension which would provide a flat rate of £144 per week from April 2016.
The Bill is likely to be given Royal Assent this spring and it is pertinent now to consider its likely impact. If the law is changed, as proposed, it will no longer be possible for those reaching state pension age after April 2016 to substitute their national insurance records for that of their former spouse. Presently, it is possible on divorce for a spouse, usually the wife, to substitute her National Insurance records for that of her former spouse if they have made greater contributions. The effect of this is that it ensures that both parties would have the same basic state pension on divorce.
However, if the law is changed it will have the effect that one party, usually the wife, will be left with a lower state pension income on retirement if they have taken time out to raise a family.
The proposed changes have been justified by the government on the basis of inequalities in the existing system, including concerns that some groups, in particular women who are usually the homemaker and child rearer, have less opportunity to save for a decent income in retirement. However, the proposed changes risk increasing such inequalities in the event of divorce as pensioners would be treated as individuals and the focus would be on each person’s national insurance contributions, rather than viewing them as couples who have worked together for a common interest.
How does this affect people divorcing now or in the future?
Presently, there can be a pension sharing order in relation to the additional state pension but not in relation to the basic state pension. If there is an additional state pension sharing order in place prior to implementation of the Act then this will be honoured although it will be important to ensure that the pension sharing orders are in place prior to the implementation of the act (likely to be April 2017).
What steps can be taken now?
Expert advice is required on how to address any significant disparity in the value of private pensions of a husband and wife, which is a relatively common scenario. There is existing legislation in place which allows for such pensions to be shared between divorcing couples. Following implementation of this Act however, matrimonial lawyers will need to consider the disparity between the state pension entitlement of a husband and wife and how this should be factored into any overall financial settlement. This does however assume that there are other assets that can be used to compensate the disadvantaged spouse on divorce.
A practical step that can be taken presently is for divorcing couples to complete and submit the form BR 19 to the Pension Service to obtain confirmation as to their state pension entitlement.
Overall, the proposed changes to the state pension may widen the gap between the retirement income of a husband and wife on divorce and this highlights the need for professional advice to ensure that a fair outcome is achieved.