- Labour has suggested the party would look to give co-habiting couples who are not married similar property rights to those who are married (Source: Labour’s common-law marriage pledge to give millions of cohabiting couples property rights (thetimes.co.uk))
- Shadow attorney-general Emily Thornberry said women risk being “put on the street” when co-habiting couples split up
- Property and pensions are likely to be the most significant assets most people own
- AJ Bell’s Tom Selby sets out three ways pensions can be divided on divorce at the moment
Tom Selby, head of retirement policy at AJ Bell, comments:
“Extending property rights to co-habiting couples who live together for a set number of years would be a huge change. For anyone who is part of a co-habiting couple and has fewer assets to their name than their partner, it could mean extra security and less financial pressure to marry or enter a civil partnership. For those with more assets than their partner, it would be another factor to consider when choosing to share a home.
“While most people think of bricks and mortar when they hear the word ‘property’, this also usually covers investments and, crucially, people’s retirement pots. In many cases, people’s pensions will be the single largest asset they own, so having to share that asset would become a significant consideration when making decisions over co-habiting if these reforms were introduced.
“Details of how this policy would operate will be crucial. In particular, Labour needs to spell out whether shared property rights would be exactly the same for co-habiting couples as those who are married and in civil partnerships, and determine after what time period of co-habiting shared property rights would kick-in.”
How pensions work on divorce at the moment
There are currently three ways in which pensions can be split at divorce, offsetting, earmarking and sharing:
- Pension offsetting is where the value of your pensions are offset against other assets you own. For example, in exchange for keeping your pensions, your ex-partner could get a larger share of the family home or any investments you own.
The advantage of offsetting is its simplicity, but there is a danger if a non-working spouse receives more of the property and less of the pension they could end up with no funds to live off in retirement.
- Pension earmarking is an agreement that when you start to draw your retirement benefits, a portion is paid out to your ex-partner. For example, if you receive £60,000 a year from your pension and the agreement is to split this equally, your ex-partner would receive £30,000 a year.
One of the key disadvantages of earmarking is that the ex-partner has no control. You decide when to take your pension, and if it’s a defined contribution scheme, how much income, if any, to take.
If you die before taking your pension, your ex-partner could receive nothing. Any income taken will be taxed at your rate of income tax, even if paid to your ex-spouse who may pay a lower rate. The ex-spouse also has no control over where the pension assets are invested and your finances remain connected after separation.
- Pension sharing is where a court sets out what amount of your pension your ex-partner is entitled to. It is usually expressed as a percentage of the fund value. Your ex-partner will need to transfer this into a pension in their own name or become a member of your pension scheme in their own right.
Pension sharing gives more control to the ex-spouse than earmarking because they are usually able to manage the investments and choose how and when they take the benefits, depending on the type of scheme it is.
