Cost of divorce following couples into retirement

People who divorce may face an ongoing financial hit from it throughout their retirement, according to new research by Prudential. Younger divorcees and women especially are making potentially very costly mistakes by under-valuing their pensions.

The financial impact faced by divorcees in retirement works out at nearly £4,000 a year, research by Prudential has found. In addition to any immediate loss of assets due to the divorce costs and settlement, people who divorce tend to have lower average incomes once they stop work.

The Prudential report found the average retirement income for a divorcee today to be £17,600 – or £3,800 lower than the UK’s average retirement income of £21,400. Furthermore, significantly more divorcees are likely to have no pension savings at all (15 per cent) compared to those who have never divorced (11 per cent).

Other key findings were that divorcees are more likely to get into debt, with 23 per cent of them in the red as compared to 16 per cent of non-divorcees. The amounts of debt are however lower among divorcees, suggesting that divorce is causing debt among those who are otherwise better at minimising it.

Clare Moffat, a pensions specialist at Prudential, said ‘People understandably focus on the immediate priorities like living arrangements and childcare [when going through a divorce], but a pension fund and income in retirement should also be a priority. A pension fund is one of the most complex assets a couple will have to split so anyone going through a divorce should seek legal and financial advice to help them do so. For many more couples, the increase in value of pensions mean that it is often the largest asset. It goes without saying that advice is crucial as early as possible in any separation where couples have joint assets.’

Women and younger couples under-valuing their pensions

The Prudential findings are especially concerning in the light of research into divorce by Unbiased¹, which found that many divorcees were under-valuing pensions during the settlement process. It also found that younger people and women were particularly prone to this mistake. Divorcees under the age of 55 valued property and cars as their two most important assets, while women prioritised property, savings & pets, furniture and cars in that order, with pensions not even making their top six. In reality, a pension is at least the second most valuable asset for most people who have them, and may have even more monetary value than the home.

Lack of awareness of this may at least in part explain the loss of retirement income revealed by Prudential. The Unbiased research correlates strongly with yet another study by Scottish Widows, which found more than seven in 10 couples fail altogether to consider pensions when hammering out a divorce settlement, which has a disproportionate impact on women – totalling a loss of £5 billion per year.

¹Research conducted by Opinium Research 1-4 August 2017 2,005 online interviews with UK adults (441 of which have been divorced)