A pension is often one of the most valuable assets belonging to an individual. However, when going through a divorce it is common for women in particular to overlook the value of their spouse’s pension. According to the “Fair Shares? Sorting out money and property on divorce” report by the University of Bristol and Nuffield Foundation, far too often women give up their interest in highly valuable pensions in order to retain the family home, often leading to them being significantly disadvantaged upon their retirement. B P Collins’ family team answers your key questions on this important topic.
How does a court typically approach pensions upon divorce?
There are three possible approaches that a court can take. These are:
- A pension sharing order where a percentage of one spouse’s pension is transferred into a pension arrangement in the other spouse’s name. The transferred amount is then held separately from the original pension scheme and belongs absolutely to the other spouse.
- A pension attachment order which directs the pension scheme to pay part of the pension benefits to the former spouse when the pension holder retires.
- Offsetting where one spouse keeps their pension, while the other receives a larger share of other capital assets now, such as (more often than not) the family home, instead of a pension share.
How are pensions divided on divorce?
A pension share is expressed as a percentage rather than as a specific sum. By way of example, if there is to be a pension share of £100,000 from a scheme with a £200,000 value, this will be expressed as 50% rather than a figure of £100,000. The value of the pension scheme being shared can fluctuate dependent on market conditions which means that the actual sum the receiving party receives may go up or down.
The person receiving the pension share will receive the credit of pension into a scheme in their own name. The credit will not be held in the sharing spouse’s scheme. Some pension schemes allow an internal transfer into a scheme held with them, others allow only external transfers.
Should the pension be shared, offset against other assets, or earmarked?
This will all depend on the individual circumstances of the parties who are divorcing. Pensions are intended to be a long-term asset rather than ready cash, so it is often appropriate for independent financial advice to be sought before any final decisions are made over the pension options. Retirement needs should be considered, not just the current position. It is important that an informed decision is made that does not leave someone vulnerable upon retirement.
If you are considering offsetting a pension, you should be aware that quite often a £1 of pension value is not necessarily the equivalent of £1 in cash. Save for any tax free lump sums, pensions are subject to taxation which will be taken into account – typically a discount of 15% for a lower rate income tax payer is applied, or 30% for a higher rate income tax payer; further a discount is sometimes applied to recognise the fact that the offset pension being retained is inaccessible (particularly if the divorcing couple are far from retirement age) whereas the other spouse will have immediate access to the offset cash/asset now. This is called a utility discount.
Pension attachment (or “earmarking”) is very rarely seen in practice. It is littered with issues for both parties and means there can be no financial clean break; the right to receive the pension will often lapse when the pension holder dies, or the receiving party remarries. It does not provide the same permanence or certainty as a pension sharing order or an offset and there are very few circumstances where it would be chosen as the appropriate option.
Do I need a pension expert or actuary?
This will very much depend on the type of pension schemes that are held. If there are pensions of significant value or are defined benefit/final salary schemes then this is more likely. Defined benefit and final salary schemes can sometimes be worth more than a Cash Equivalent Transfer Value (CETV) might suggest. An actuary will look at the value of the benefits of such schemes to work out their “true” value.
If offsetting is also a consideration, then you are likely to need the input of a pension expert because of the consideration of taxation and to determine an appropriate utility discount.
What happens if a pension is already in payment?
A pension can be shared even if it is already in payment. However, the spouse receiving the pension share from a scheme in payment will not be able to take a tax-free lump sum on any share they receive on transfer if this has already been drawn from the originating pension.
How long does it take to implement a pension sharing order?
When a pension sharing order has been made, a copy is sent to the pension scheme which manages the pension being shared. Once the scheme has all the information it needs, and any fees it may charge paid, it has four months to implement the pension share. As a pension share is expressed as a percentage and not a specific sum, the value of the schemes can fluctuate dependent on market conditions, which means that the percentage the receiving party is due to receive may go up or down over the period of time between the order being made and the pension sharing being implemented.
Pensions can be complicated but are a significant asset and should not be overlooked during divorce proceedings. Whether a pension is shared, offset against other assets, or subject to an attachment order will depend on the circumstances of each case. Obtaining specialist legal and, where appropriate, financial advice can help ensure that any settlement properly reflects both parties’ needs and provides financial security in retirement.
For further information and advice, please contact Laura Mortimer or B P Collins’ family team at enquiries@bpcollins.co.uk or call 01753 889995.
