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Insights // 18 November 2016

Family Law & Pensions on Divorce

Partner Claire Dyer, in our leading Family Law team, explores the importance of not overlooking pensions when negotiating a financial settlement on divorce.

When negotiating a financial settlement on divorce, it is important that you do not overlook pensions, particularly if you have been married for a long time.  Pensions can be exceedingly valuable assets and the court has a range of powers to ensure that a former spouse does not lose out on divorce.

What is there?

The first step is to find out what pensions there are and what they are worth.  This is done as part of the disclosure process.  Both spouses must obtain an up to date Cash Equivalent Value (CEV) for all of their pensions.  This is the amount which the pension company would pay to the member if they were to transfer their pension rights to another scheme.

Mainstream pensions broadly fall into two types – defined contribution (also known as money purchase or personal pension) and defined benefit:

Defined contribution pensions are essentially a pot of money within a pension wrapper.  The member, and sometimes their employer, makes monthly contributions to the scheme which are then invested.  The CEV will usually be the current value of the funds in the scheme, possibly less a small administration charge.

Defined benefit pensions are provided by your (former) employer and are based on the number of years you have worked for the employer and your final (or career average) salary.  The employer has to provide the funds to meet these pension payments and each individual member does not have their own allocated portion of these funds.  In these circumstances, the CEV is a notional value for the pension, which is prepared by the scheme’s actuaries according to the scheme rules.  The CEV rarely reflects what it would cost to replicate the pension elsewhere.

There are a number of other types of pensions – eg SIPPs and SSASs – and all of them should be included.  Also state pension entitlement should not be overlooked – the old Additional State Pension Scheme (formerly SERPS and State Second Pension) can be valuable.

What can the Court do?

The court has the following powers:

Pension Attachment Orders (formerly earmarking) – the Court can make an order which requires the spouse who is a member of the pension scheme to pay a percentage of the income and/or the tax free lump sum to their former spouse.  Before pension sharing was possible, this was the most common method of dealing with pensions, but it is now used relatively rarely.  There are a number of disadvantages with such orders: a) if the member spouse dies then the pension dies with them and the former spouse will receive nothing; b) it is possible to vary Pension Attachment Orders to reduce the percentage payable; c) the income payments automatically end if the recipient remarries; d) the payments are based on the pension income at retirement so a former spouse can benefit from pension contributions which are made after the divorce.

Pension Sharing Orders – the Court can require one or more of the pensions to be shared with the other spouse.  This requires a percentage of the CEV to be transferred to the spouse, either within the existing scheme (an internal transfer) or to an alternative pension arrangement (an external transfer).  The recipient can then draw on that pension at the appropriate retirement age.  It is usually necessary to obtain expert input from an actuary to advise on the appropriate pension sharing, unless all of the pensions are defined contribution pensions.  The actuary will often be asked to say what pension sharing order(s) would be required to achieve equality of income at a given retirement age.  The cost of obtaining the report is usually shared between the parties and is money well spent.

Offsetting – occasionally the best way to deal with pensions is to offset their value when dividing the liquid assets, such that the spouse with the lesser pension provision takes a greater share of the other assets.  This will be more likely where the value of the pensions is fairly low compared to the other assets, as most pension providers charge a fee to implement pension sharing, which can sometimes be quite high.  If you are considering offsetting, however, it is important to ensure that you are working on a proper valuation of your spouse’s defined benefit pension, not just the scheme valuation.  The true worth of the pension is often far greater and this should be taken into account when calculating the correct asset value to offset.  An actuary can be asked for input on this.

What should I do?

Pensions can be very complex and it is important to seek expert input – from a specialist family lawyer and possibly an IFA and/or an actuary.  You should obtain advice early on so that pensions are properly taken into account in your financial settlement otherwise you could lose out by a significant amount.

References to divorce apply to heterosexual and same sex marriages and also include dissolution of a Civil Partnership.

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Claire Dyer

Claire Dyer

Partner, Family Law

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