When a married couple separate and consider divorce, it is not uncommon for their first thoughts to turn to issues such as what will happen to the marital home and what will be the arrangements for any children that couple may have? The issue of sorting out pensions can sometimes be at the bottom of the pile of things to resolve. However, pensions are often an extremely important part of a financial settlement.
Why Pensions are Important
Pensions often form a significant and valuable part of the assets of a divorcing couple, and to overlook them or not take them into account properly when considering terms of settlement could easily lead to an unfair outcome. A pension can provide you with a tax free lump sum payment and an income when you decide to retire, and are therefore an extremely important part of retirement planning. Even if you have a full National Insurance record, and you qualify for the New State Pension, the current payment is just £175.20 per week, far less than most would consider necessary to live on in retirement.
But the pension is in my spouse’s name so doesn’t it have to stay with them?
As a pension can only be in one person’s name it is not uncommon for that person to think that it therefore belongs to them and does not have to be shared with their spouse upon separation. However, and regardless of this, a pension will form part of a married couple’s assets when considering division and settlement. The fact that one spouse may have built up the pension over a number of years or even before marriage does not matter; it will still be a part of the couple’s assets and have to be considered when negotiating terms of settlement.
The two main pension types
The two main types of pension are Defined Contribution (DC) and Defined Benefit (DB). When we come to consider the value of a pension, the need to distinguish between a DC and a DB pension is important, as the nature and form of the pensions are very different.
The value of a DC pension derives from how much has been paid into the pension, how long it has been invested, and how well the investments have performed. Therefore, the benefits upon retirement are not fixed or guaranteed. A common example of a DC pension is a personal pension where you (and potentially your employer) will make payments into the pension with the pension fund then invested on your behalf.
Conversely, the value of a DB pension does not derive from what has been paid in, but rather by what benefits the pension will give upon retirement. The benefits of such a pension are therefore set in advance and relate to, for example, the length of your service and your salary as opposed to investment fluctuations. A common example of a DB pension is a ‘final salary’ pension.
How pensions can be dealt with on divorce
There are three main ways that pensions can be dealt with on divorce:
Pension sharing
This is the process whereby the pension of one spouse is shared with the other. A pension sharing order provides instructions to the pension provider to transfer a percentage of one spouse’s pension to the other.
Depending upon the pension scheme, the shared element of the pension can sometimes stay with the same pension provider, or it will be transferred into a different scheme. The key point is that the spouse that receives the pension credit will then have a pension in their own name, and the benefits would not be lost if the other spouse were to die or remarry.
The percentage of the pension shared with the other spouse does not have to be equal, and it can be anything up to 100% of the pension, depending upon the circumstances of the case. It is also important to note the even if a pension is shared equally, this does not mean that both spouses would then have the same benefits/income in retirement. Professional advice is often required to assist and advise in relation to appropriate split of the pension to achieve a fair outcome.
Offsetting
This is a process whereby a couple agrees that that there can be a trade off by way of one spouse retaining all of or a larger share of their pension in lieu of the other spouse retaining all of or a larger share of a different asset. A common example is where one party may seek to retain all of their pension in lieu of which the other party retains all of or a higher percentage share of the marital home.
Whilst pension offsetting may appear straight forward, it can be difficult to assess, and the wrong decision could lead to an extremely unfair outcome. The main problem with this approach is that the value of a pension fund (and therefore the right to receive an income and/or capital sum in the future), is very different to valuing an asset such as the equity in the marital home. It is often said that this is trying to “compare apples and pears”.
Pension attachment orders
Under such an order a percentage of one spouse’s pension is paid to the other spouse, which can include a percentage of any tax free lump sum in addition to the income. However, pension attachment orders are now rarely made, as the person who is to receive the benefit has to wait until the other spouse is actually receiving their pension, but most importantly the pension payments end when the spouse who owns the pension dies, or if the receiving spouse remarries. Furthermore, either spouse can ask the court to change the order at a later date, and so such orders can result in significant uncertainty.
What to do if pensions will be an issue in your divorce settlement
The first thing that needs to be established is finding out how much the pensions are worth. Without having this information it is impossible to assess whether any terms of settlement will be fair. Although it may sometimes seem easier to do so, do not simply agree things such as “I will keep my pension and you will keep yours” without knowing what this actually means in financial terms.
Once the value of the pensions and an understanding of the benefits have been provided, we need to remember that pensions are usually only one element of a couples assets that will need to be considered. If the pensions are of significant value, and particularly if there are DB pensions involved, then it may be necessary to seek advice from a pension expert who can advise on how a pension should be shared to achieve a fair outcome or perhaps an appropriate capital sum if there is to be offsetting. Although there will be a cost to obtain a report from a pension expert, if one is needed then the cost of the report can pale into insignificance when compared to the financial cost of not obtaining a report and making the wrong decision.
If you need help with pensions on divorce then you should seek specialist legal advice from one of our expert family lawyers at Antony Clapp Solicitors. Contact us on 01622 815 940 for a confidential discussion with one of our team.