17 June 2016
How to deal with pensions on divorce
Scientific advances and lifestyle improvements mean we are on track to be more long-lived than ever and pensions are what the vast majority look to in retirement to ensure their needs are met.
It comes as no surprise then that pensions are increasingly prominent in divorce and dissolution cases. Frequently nowadays, after the family home, pension assets are a married couple’s most valuable asset. Wherever possible our aim is to help you reach an agreement about how your financial resources (including pensions) should be divided between you on a divorce or dissolution of a civil partnership.
When reaching agreement about what should happen to your pensions if you are separating, it is important to consider the various options. Claire Filer, senior associate in B P Collins’ family team, looks at the different ways that pensions can be dealt with.
One method is offsetting. This involves setting-off the value of pension assets against other financial resources. For example, if spouses or civil partners own investments or a home and one of them has a pension, offsetting may see that party retaining their pension but receiving a reduced share of the other assets.
“One challenge in this approach is agreeing the appropriate amount of liquid assets to offset the pension assets against,” says Claire. “£50,000 invested in a pension that is not accessible for many years is arguably worth less than £50,000 invested in a property or in a bank account today. A discount (known as a utility discount) is often agreed to the value of the pension asset to reflect that.”
Pension sharing is a more common solution and involves the court legally dividing up pension assets pursuant to a consent order. The pension sharing order it makes requires the pension scheme to transfer a percentage of the owner’s pension to their spouse or civil partner. To agree an appropriate pension share it is important to ask your pension provider for a cash equivalent (or “CE”) valuation and also ask for confirmation that the pension can be shared. If it can’t for any reason it might be that offsetting is a more appropriate solution.
If the former spouse or civil partner has a pension already, the pension share can be added to that asset. Alternatively, it can be transferred into a new pension scheme.
Currently, pension sharing orders may not be made in relation to the basic State Pension. It is however possible for a former spouse or civil partner to use the other's national insurance contributions to increase their own basic state pension. However, this will change with the introduction of the new State Pension. This applies to people who reach State Pension age from 6 April 2016. Those who start divorce or dissolution proceedings after that date will be caught by the new rules. There are transitional arrangements that apply to couples who have built up National Insurance contributions prior to that date.
The DWP has published an information booklet summarising the changes.
When and how pensions are divided on divorce or dissolution will always depend on your circumstances.
With certain schemes, it can be crucial to have input from a pension specialist, such as an actuary.
“We have excellent working relationships with pension professionals who prepare expert reports,” says Claire.
“These reports examine the key features of your family’s pension assets, and how they can best be shared to ensure your needs are met.”
It will be necessary to look at pension assets in the overall context of your family’s financial resources. Whether offsetting or pension sharing is appropriate will depend on a number of considerations, including:
- the earliest date that pension benefits can be taken, and when the pension owner actually intends to retire;
- the capital sum and income that each pension asset will produce;
- your income needs when you retire – what will you need realistically to run your household?
- whether there are other assets of significance that could be used to meet your needs in retirement.
To speak with Claire about dealing with pensions on divorce, call 01753 279046 or email email@example.com.