Pensions and Divorce
If you are currently going, or already have gone through a divorce and you and your ex-spouse are looking at dividing up your assets, then the Court will be required to take your pension rights into account.
The options that the court can offer are as follows:
- balance the pension rights against another asset, such as the matrimonial home (this is known as Pension Offsetting); or
- arrange that when one party’s pension eventually comes into payment, a portion of it will be paid to the other party (this is known as Pension Earmarking); or
- split the pension at the time of the divorce to give both parties their own pension pot for the future (this is known as Pension Sharing).
The first step after contacting a solicitor is generally finding out what both you and your former spouse’s pensions are approximately worth. This will mean contacting your pension providers for valuations of whatever pensions you may have. It should be noted that your former spouse will not have any right to know what your pension value is without your consent.
You should really attempt to understand what the implications of each of the three methods of taking pension rights into account in a divorce settlement.
However one thing you should be aware of is that transferring from a final salary or career average scheme to a money purchase scheme (or personal pension plan) can carry a number of risks. You should seriously consider taking independent financial advice before sharing a pension so that you understand whether you are likely to lose out financially.
The Court can issue a Court Order to the following types of pensions:-occupational pension schemes (funded and unfunded, approved or unapproved), personal pension schemes, retirement annuity contracts, and Section 32 Buy-out Plan.
The Court can consider pension plans that you and your former spouse are currently paying into, plans that have been frozen in the past and plans that are currently paying you an income.
Arrangements that are outside the scope of the processes covering pensions and divorce are state benefits, Equivalent Pension Benefits earned between 1961 and 1975, and any pension rights a person is in receipt of by virtue of being a widow, widower, or dependant.
Pension Offsetting
All the couple’s assets are taken into account and pension benefits are offset against other assets (e.g. the family home). The party with the pension rights keeps them for him/herself and the other party is given the benefit of other assets, such as the right to live in the matrimonial home or an equivalent lump sum.
Achieving a fair share of a couple’s total assets by offsetting a pension pot against other assets can often be a fraught process. This may be because pensions do fluctuate in value more often because they tend to invest in assets such as shares. If it turns out to be difficult to achieve offsetting, one or other of the alternative bases is then likely to be used.
Earmarking
Pension Earmarking was introduced by the 1995 Pensions Act, for divorce petitions filed on or after 1 July 1996 (or 19 August 1996 in Scotland).
The pension scheme, on instruction from the Court, pays a specified amount of the member’s pension and/or lump sum (in England, Wales and Northern Ireland) or a specified amount of the member’s lump sum only (in Scotland) to the ex-spouse. The amount is ascertained at the time of the divorce but as with all periodical payment orders, either party can apply to the Court to have the amount varied. The payment is made when the spouse with the pension pot decides to retire, say, or when they die.
Earmarking has not proved entirely satisfactory in practice. Mainly because it does not achieve a ‘clean break’ and does not enable the ex-spouse to receive retirement income until the spouse with the pension pot retires. An additional drawback is that if the Divorce Order is for the regular payment of a pension, those payments will stop when the spouse with the pension pot dies or if the party receiving the earmarked pension remarries (for reference, the right to a lump sum under an Earmarking Divorce Order does not stop on remarriage).
Pension Sharing
The Welfare Reform & Pensions Act 1999 gave powers to the Court to split pension rights between husband and wife on divorce. This legislation is not retrospective and only applies to proceedings for divorce or annulment filed on or after 1 December 2000.
The basic concept is to separate the ex-spouse’s benefit entitlement (as specified in the Court Order) from the pension scheme member’s, so that there is a ‘clean break’. A Pension Sharing Order is issued that creates a Pension Credit Member (the ex-spouse) and a Pension Debit Member (the member).
The Pension Credit is based on the member’s Cash Equivalent Transfer Value (CETV). The Credit will be a percentage of the CETV, not a fixed sum of money. The CETV is calculated as of the day before the Pension Sharing Order takes effect, so it can be higher or lower than the value disclosed at the start of the divorce proceedings. The Pension Sharing Order takes effect from ‘the date on which the Decree Absolute of Divorce or nullity is pronounced or if later, either (a) 21 days from the date of this Order, unless an appeal has been lodged in time, in which case (b) the effective date of the Order determining that appeal’.
As you can see this is another area which is laden with pitfalls. If you are currently in this situation then please just get in touch and get some valuable advice.
