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Pensions and Divorce
In many financial remedy proceedings on divorce or dissolution, the two main assets which the spouses or civil partners will need to divide are the family home and the parties' pension funds. It is very important to get the right advice on the steps that need to be taken to enable any pension provision to be dealt with fairly.
Until 1996 the family courts had few powers to enforce the redistribution of pension assets in financial settlements on divorce. However, pension attachment orders were established on 1 August 1996, and a few years later, on 1 December 2000, pension sharing orders were introduced (under provisions contained in the Welfare Reform and Pensions Act 1999, amending the Matrimonial Causes Act 1973).
Pension sharing orders
If it is decided that the parties' pension provision is going to be divided in some way, the usual approach is for a pension sharing order to be made. This means that some or all of the pension funds existing at the time of the divorce or dissolution can be divided in percentages. It is perhaps easiest to look at this from the point of view of a practical example.
Michael and Helen are in their 50s. Helen is a head teacher and Michael is a self-employed plumber. Helen has a final salary pension within the Teacher's Pension Scheme whereas Michael has only got a few thousand pounds in a stakeholder pension scheme. Especially where large final salary schemes are involved, it is wise to instruct an actuary or other appropriately qualified financial professional to work with the solicitors and advise on the correct pension sharing order needed to bring about the desired outcome.
In this case, Michael and Helen have agreed that they want to achieve an equal income in retirement from the pension funds they currently have. The actuary will calculate what percentage of Helen's pension needs to be transferred to Michael so that, taken together with his small stakeholder pension, the pension funds he has after the divorce will produce the same income as Helen's.
After the divorce has gone through, Michael will get his own pension within the teachers' scheme, which he can take in accordance with the rules set by the scheme. Helen's pension provision will be reduced by a corresponding amount. Helen is still working and Michael is still putting money into his stakeholder pension. Any pension contributions made after the divorce will not be shared as the order only covers funds accrued up to the implementation of the order and the creation of the new fund for Michael.
Pension sharing is possible in relation to a whole series of other final salary schemes, defined contribution schemes and other more unusual arrangements.
Problems with pension attachment orders in family law
In a very small minority of cases, the court may rule that a pension attachment order should be made. There are certain unusual situations where a pension attachment order is made in preference to a pension sharing order. Although unavoidable in a handful of cases, a pension attachment order has some disadvantages.
Whereas a pension sharing order divides up the parties' pension provision at the time of the divorce and leaves the parties with their own separate pension funds, a pension attachment order is a type of maintenance order which obliges the pension scheme to pay a certain percentage of the monthly pension payments and/or cash lump sum paid out on retirement to the other party. Because a pension attachment order is really a form of maintenance paid from the pension fund direct rather than from the paying party, it does not allow for a clean break financial settlement.
If the pension scheme is paid into voluntarily, the court has little or no power to enforce an individual's continued contributions to the scheme or, if a retirement age is not specified by the scheme, to stipulate a time at which the member must retire so as to suitably benefit the other spouse. This latter disadvantage would usually be mitigated by ordering conventional maintenance to be paid from one spouse or civil partner to the other until the point of retirement, after which the pension attachment order would kick in.
If the person with a pension fund were to die before retirement, then the entitlement to a percentage of the monthly payments would be lost to the other party, making pension attachment orders fairly risky. There are ways to mitigate this risk through life assurance and other possible options but it is by no means straightforward.
This isn't a type of order, rather, it is a way of recognising pension provision within a financial settlement without actually making an order redistributing the parties' pension funds. 'Pension offsetting', in a nutshell, is giving someone more of the non-pension assets instead of making a pension sharing or pension attachment order in their favour. To take a very simple example, a couple might be selling the family home and would ordinarily divide the proceeds 50/50. However, if one of them had a small pension fund and the other did not, the person without the pension fund might agree to take more of the sale proceeds from the house to balance out the situation.
Although this can work for some people, the approach must be treated with great caution as it is impossible to produce a mathematically accurate comparison between pension and non-pension assets. Cash equivalent values for pensions can be misleading. Many people do not have enough non-pension assets to balance out the value of their pensions. Also non-pension assets can often be accessed immediately whereas there are age limits on when pensions can be claimed. Independent financial advice is important here.
Pensions may be a distant prospect for younger couples but they can be an extremely valuable asset that should not be overlooked in the negotiation of a financial settlement on divorce. There are many ways of dealing with them: pension sharing, pension attachment or offsetting. Professional advice from actuaries and independent financial advisers is a must in many cases involving pensions.
The foundation for the successful division of pension assets on divorce is to find out what each of you has got early on in the process. This might mean ringing round a whole series of pension companies and former employers to check what provision you have built up over the years. Only once the right information has been gathered can the task of deciding how to deal with the pensions begin in earnest.
Alternatively, read more about how we can help you and divorce law in general here.
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