In most divorces, there is at least one person with a pension of a sizeable value. Pensions are part of the asset pot that will be divided between you and your spouse. It can be one of the larger assets held and can be pivotal to obtaining a fair settlement. Pensions are complex and how they are dealt with in a divorce case can also be very complex. So let’s look at some key considerations.
A pension provides a regular source of income when a person retires. As we are living longer a pension provides income for a proportion of a person’s life. It is a long-term investment and during their working life. A person and or employers can pay a percentage of their income into a pension fund.
There are different types of pensions, from the state pension, which is provided to you by Government from the national insurance contributions you made from your salary to private pension funds such as work or company pension or personal pension that you set up with a pension company.
Before you decide what to do with your pension, you need to get a pension valuation. The pension valuation states what your pension is worth at this given moment in time. This valuation is often referred to as the Cash Equivalent Transfer Value (CETV). This is calculated by the pension provider. The valuation amount is the amount available should you decide to transfer all or part of it.
How do I request a Pension Valuation?
You will get your pension valuation by completing a simple form called ‘FORM P’. The completed form is sent to your pension provider. They will use the information to provide you with a valuation. The valuation is calculated from the start date to the date the request is received. They shouldn’t charge you for this unless you have had a valuation in the past (usually in the past 12 months). Each pension provider operates differently so if you are unsure, check with them first. You will be charged if the pension is already in payment though.
It can take a few weeks to get the valuation, so apply for it as soon as you start the divorce process.
If your pension was built up during your marriage, it is considered a matrimonial asset. Therefore, it will be considered part of the financial settlement. The courts like to compensate the party who is losing out on the pension because of the divorce. It is irrelevant who paid into it.
Pensions that can be ordered by the court to be shared include:
- personal pension
- employer pension
- Second state pension
- final salary scheme
You can not share basic state pensions.
Once you have the valuation you will need to decide how you are going to deal with it as part of the divorce financial settlement. You shouldn’t look at the pension in isolation but list all the assets that are to be divided among you.
There are 3 possible ways of dealing with pensions in divorce:
- Offsetting – by adjusting other assets of the marriage to take account of pension rights.
- Attachment – by making an order which allows for all or part of any pension or lump sum arising at retirement to be ‘earmarked’ for the other spouse.
- Pension sharing – splitting the pension so that the benefits are subdivided at the time of the divorce; the parties will then have two separate pensions to which they can continue to contribute in the future.
Pension offsetting is when the parties look at all available assets including pensions and offset the pension against other assets. For example, if you have a pension which is roughly the same value as the equity in the family home, one person can agree to keep the house and the other can keep their pension. This means the pension has been offset by the equity in the home.
Offsetting sounds simple but you need to be careful before you enter into any agreements to offset a pension. Pension grow in value in time. Offsetting may be useful in the following situations:
- Where a pension is very small
- If both parties have equal pensions,
- Whether the parties are young and have time to build up their own pension
- Where your priority to have the house so that you can house the children.
If the pension asset is significant then you should seek professional guidance.
Pension Sharing Orders
A pension sharing order divides pension benefits between the parties at the time of divorce. The order states what percentage of the pension is to be shared. That percentage is then transferred out into a different pension so the parties have their own pensions. This means that the party with the pension benefits loses that percentage of their pension and their spouse acquires that percentage.
A pension sharing order can only be made when you are divorcing. It will take effect when you get the decree absolute, this is the final stage of the divorce. You can click here to download the Divorce Process Guide.
If you do have a pension sharing order, the pension valuation will be re-calculated when the order is implemented.
Pension Attachment Order
The court may order that once pension becomes payable, the person responsible for the pension arrangement pay part of the pension income and/or lump sum available under that arrangement to the other party.
This is a way of getting spousal maintenance or a lump sum – once the pension is in drawdown. So the benefits are deferred.
These orders are impractical because it is difficult to know what the position of each party will be when the pension becomes payable or the value of the asset to be divided. The court is also powerless when it comes to making sure the partner responsible for the pension will continue paying into it. This means the person who has the pension in their name can stop paying into it to deprive their spouse. Some people have even delayed their retirement to delay paying the pension to the other party. This makes the receiving party vulnerable because they may not have the income stream or the lump sum that they originally thought.
More significantly, when you have a pension sharing order, you can not get a clean break from each other because they create an ongoing commitment.
These orders are only really appropriate where the asset is worth very little at the time of divorce but likely to increase drastically in value by the date of retirement.