Divorce and Pensions Explained

Pensions are considered to be one of the most frequently misunderstood and mismanaged elements of any financial settlement between separating spouses.

For many people when separating, they naturally focus on the immediate issues – where am I going to live, when will I see the children. Pensions can often be forgotten about, not placing themselves particularly highly in the order of issues to be considered. However, you should seek expert advice when you separate.

Our specialist team of divorce lawyers in Milton Keynes will be able to provide detailed advice tailored to your circumstances. In the meantime, this article provides a quick guide to pensions and divorce.

When considering how to divide assets upon separation, pensions are considered in the same way as all other assets, including houses and bank accounts. However, in dividing them, the court only has three possible options:

• Pension attachment order
• Pension sharing order
• Pension offsetting

A pension attachment order, sometimes known as earmarking, is comparatively rare and sees some of the private pension a person receives being redirected to their ex-spouse. It is comparable to receiving spousal maintenance from pension money, instead of earned income.

A pension sharing order is common in circumstances in which settlements are achieved with the help of the court and solicitors. It sees a percentage of a private pension transferred to a spouse, so that both parties have a financial clean break.

Pension offsetting sees one party retain their pension assets in lieu of other assets they may be able to claim over, e.g. savings or equity held in the family home.

Pension attachment orders have fallen out of favour with the courts in recent years, although still offer perfectly good routes to achieving a fair and reasonable settlement between parties to divorce.

Pension attachment orders allow both parties to benefit from a tax-free drawdown from the scheme, in addition to the pension income, in addition to allowing any death in service benefits to be set aside. Pension attachment orders will also follow any move to a new scheme made by the original arrangement holder.

Although there are clear advantages associated with pension attachment orders, they have fallen out of general favour with the courts because they don’t provide control to the party receiving the benefit of the order, they don’t offer a financial clean break between the parties and, usually, the death of the scheme holder sees the benefits under the pension scheme fall away.

For those cases requiring some form of pension order, pension sharing orders are now far more commonplace. The order sees the transfer of a percentage of a pension scheme to the non-holding party. The recipient party can usually elect to determine whether their share in the scheme that has been ordered to them is retained within the original scheme or moved externally to a new pension product.

Pension sharing orders provide the parties with a clean break and allows the receiving party to manage their finances with greater control and certainty than pension attachment orders.

Pension credits (or debits) do not count against the annual allowance, but there can be implications against a party’s lifetime allowance. It is important that specialist advice is sought on this issue if you have any concerns, given the potential tax consequences.

Understanding whether a pension sharing order is the right type of approach to deal with pensions in your case is a complex decision and one that would benefit from specialist legal advice.

It is important that the issue of pensions is not considered by lawyers alone, in many cases your lawyers will be working with IFAs, accountants, specialist pension report authors etc to ensure that you receive the right outcome in dealing with pensions as part of your divorce.

Whether it is right to share out your pensions and how to share them will depend very much on the particular circumstances of your case. Pensions are just one part of the jigsaw when working out an agreement with your ex about your finances when you divorce.

As with all other assets, the court’s overall aim is to achieve fairness, but this doesn’t automatically mean everything (including pensions) are shared 50/50. For example, if you built up a decent amount of your pension pot before you married, you might think it only fair that you keep that when you divorce. This is often called ‘ring fencing’.

The court will often rely on specialist “pension on divorce” reports to determine what the right level of pension sharing might be, given that all the schemes held by the parties probably all provide different benefits. As with other assets, the process begins by attempting to value the pension scheme.

The starting point for valuing all private pensions for the purposes of divorce is something called the cash equivalent transfer value (CETV). The CETV is the amount of money your pension manager would have to pay into a new pension if you wanted to move to a new pension provider.

Although the CETV provides a good, workable valuation for a pension scheme, it is not entirely accurate. It is a good way of measuring how much the pension pot is worth at the time you ask for the valuation, but not what you will get as an income when you retire – and after all, this is the general purposes most people have a pension for. The CETV is the starting point for valuing pensions but the CETV doesn’t tell you anything about what income you will get when you retire or what other benefits the pension may give you.

Ready to take the next step? As leading divorce solicitors in Milton Keynes, our team of family law specialists can advise and guide you from the moment we start working with you. We also have offices in in Bicester, Watford, oxford, hemel hempsead and London. Talk to us in confidence and find out where you stand. Get in touch – we’re here to help.

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