Pensions and Divorce Explained

Posted on: 4 mins read
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Chris Fairhurst

Partner, Family Law and Divorce Solicitor

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It’s not been until recently that pensions have come to be seen as a separate asset in divorce financial settlements.

In some divorce cases, a pension can be the single largest and most valuable asset there is, and in other cases, it’s the only asset. So it’s important to ensure you have a robust plan in place in how to handle your pension if you’re getting a divorce.

For initial advice get in touch with our Divorce Solicitors.

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How Will the Court Deal with the Pension?

The Court has three ways to deal with pensions in a divorce settlement, where the need arises. This could be when one person has considerably less pension than the other, or sometimes no pension at all.

One example of this could be a wife who had left her career to raise the children.

In England or Wales when a couple gets a divorce and they can’t agree on how to divide their financial assets, the Court can decide for them; but this will cost much more and take longer, so it’s always best for divorcing couples to reach an agreement with the help from a Divorce Solicitor.

Since the introduction of Pension Sharing in December 2000, pensions must be included in a divorce settlement, and are part of the total value of marital assets you share with your spouse. This can be achieved by:

  • Pension Offsetting
  • Pension Earmarking
  • Pension Sharing

Pension Offsetting

Firstly, the Court can offset any imbalance in pensions by simply awarding one person more of the other assets in the marriage, to make up for any difference. Often this may be after the break down of a short marriage, or where the difference is relatively small.

There may well be other assets that the value of the pension can be offset against. This can include property or cash of the same value as the pension. Always remember, though: you’re not just offsetting the capital value of the pension: but the income it generates as well. Make sure you take this into account

Importantly, pensions are not liquid assets and can only be turned into cash on retirement. Think carefully here as the value might actually be lower when the actual pension assessment is made.

Pension Earmarking

This is a little-used remedy by the Court. Essentially, the Court will Order that an element of either or both of the lump sum payable on taking the pension, or the income stream it generates, are paid to the other person.

This can have drawbacks, however, such as if the pension holder dies before drawing down the pension, then the other person would receive nothing. If you remarry before the pension is drawn down, the Court Order will fail and again, you’ll receive nothing.

Furthermore, the person receiving the payment cannot control when the pension holder retires and so may have to wait many years to receive anything.

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Pension Sharing

This is the preferred route of most Divorce Courts. Essentially, a pension sharing agreement allows one person the opportunity to secure a percentage of their spouses’ pension rights, putting that percentage into their own name.

This is preferable in many divorce cases because a person can feel more in control of their own future, rather than being dependant on an ex-spouse.  It allows more flexibility if they choose to retire, and if the recipient dies before retirement, then the pension investment can be paid to children or a new spouse.

Any part of a pension received under a Pension Sharing Order can be transferred to a new or existing pension scheme or stay in the original one. It will depend on the rules of the scheme as to what can happen to that share. Look out for hidden charges as some schemes can charge large fees for administering pensions sharing orders. The only pension schemes that cannot be shared are the Basic Pension and the new State Pension and certain Armed Forces pensions paid to those wounded in action.

Issues can arise around the value of a pension, but our Divorce Solicitors can make sure that your pension is correctly valued by an actuary or a Pensions on Divorce Expert. The value of the pension will be expressed as the cash equivalent value, also known as CEV.

How Is a Pension Valued?

The Court will use what is called the Cash Equivalent Transfer Value; or CETV. The pension companies have to provide this figure to you if either you or your Solicitor (with your authority) ask for it. 

However, some pensions, especially public service pensions and Armed Forces Pensions and any final salary schemes may need specialist valuations to be carried out by an Actuary. Certainly, if you are looking to take a share of a pension of this type or if the CETV of the target scheme and the other scheme are over £200,000.00, then you should get the advice of a Pensions Actuary before your divorce financial settlement. 

In England and Wales, Judges are now expecting to see such reports when they are being asked to make a Pension Sharing Order.

Dealing with pensions in divorce is a highly technical and complicated issue. Professional advice is vital and our Divorce Solicitors have access to a full range of services and tools to ensure that your pension and other financial interests are protected.

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