Pensions on Divorce or Civil Partnership Dissolution

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Pensions on Divorce or Civil Partnership Dissolution

Pensions can be a highly valuable asset and are crucial in ensuring the future security of a couple going through a divorce. Unfortunately, pensions are often paid insufficient attention when the financial aspects of a divorce or civil partnership dissolution are addressed.

Negligence claims against solicitors who have provided incomplete or incorrect advice on pensions are sadly not uncommon. It is therefore vital to get the right advice at an early stage.

Our family lawyers have extensive experience of handling straightforward and complex pension assets, both in the context of financial agreements and contested financial proceedings. 

We have excellent working relationships with expert actuaries, financial planners and independent advisors so that all our clients have the opportunity to obtain up to the minute advice on this difficult area.

Handling Pension Assets on Divorce

Retirement may be a distant prospect for many couples but this does not mean that pensions can simply be ignored. All pensions have unique features that may require special consideration when dealing with them within divorce.

The first step towards handling pension assets on divorce properly is to find out what provision each party has early on in the process. This will very likely mean each party contacting a series of pension companies and former employers to check what provision they have built up over the years.

Only once the right the information has been gathered can the task of deciding how to treat pensions on divorce begin in earnest.

Family law in England and Wales offers a range of options for dividing pensions on divorce: pension sharing, attachment or offsetting. Professional advice from actuaries and independent financial advisors is often a must in many cases involving pensions, especially where there is substantial provision and/or a defined benefit scheme (e.g. a final salary pension).

Public sector pensions can be particularly complicated. Their cash equivalent valuations may not fully reflect the benefits available under the scheme and can be misleading. Employers, such as the NHS, armed forces, police and fire service, have had to reform their pension schemes multiple times. As a result, they may be administering multiple schemes simultaneously, each with different rules and options for pension sharing.

Pension Sharing Orders

If it is decided that a couple’s pension provision will be redistributed, a popular approach is to put in place one or more pension sharing orders. This means that one or more of the parties’ pension funds existing at the time of the divorce can be divided in percentages. Pension sharing orders can be made in respect of future pension entitlements and pensions already in payment. 

If large and/or complex defined benefit schemes are involved, a good solicitor will recommend instructing an actuary or other appropriately qualified financial professional to advise on the pension sharing order needed to bring about the desired outcome.

Let’s look at a practical example:

Michael and Helen are in their 50s and going through a divorce. Helen is a head teacher and Michael is a self-employed electrician. Helen has a defined benefit pension from the Teachers’ Pension Scheme whereas Michael has a modest stakeholder pension forecasted to generate a few thousand pounds per year. 

The couple have agreed that they want to achieve an equal income in retirement using the pension funds they currently have. An actuary calculates what percentage of Helen’s pension needs to be transferred to Michael so that, taken together with his stakeholder pension, the pension funds he has after the divorce will produce broadly the same income as Helen’s, taking account of their respective life expectancies. A fee is paid to the Teachers’ Pension Scheme to cover the costs of implementation.

After the divorce has gone through, Michael will get his own pension within the Teachers’ Pension Scheme, which he can take in accordance with the rules set by the scheme. Helen’s pension provision will be reduced to take account of this. 

Helen is still working and Michael is still putting money into his stakeholder pension. Any pensions 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 pot for Michael.

Pension sharing is possible in relation to a whole series of other defined benefit schemes, defined contribution schemes and more unusual arrangements, provided they are located in the UK.

Pension Offsetting

There is no such thing as a pension offsetting order per se. Pension offsetting is the term used when a party to a divorce trades a potential entitlement to their spouse’s pension for non-pension assets, such as property or cash. In some cases, high pension sharing fees may be charged by schemes to share relatively modest pension provision, making a pension sharing order poor value for money. There may also be non-financial reasons why a party prefers to receive capital now instead of a share of a pension.

Valuing a pension is not straightforward, so it can be difficult to arrive at an appropriate figure that takes into account all the relevant factors without taking expert advice. Offsetting is not necessarily a simple option and parties considering an offsetting arrangement need to go into it with their eyes open, particularly if they have declined expert actuarial input or financial advice.

Pension Attachment Orders

In a small minority of cases, the parties may agree or the court may decide that a pension attachment order should be made. There are certain situations where a pension attachment order will be preferable to a pension sharing order.

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 that obliges the payer’s pension scheme to pay a certain percentage of the monthly pension payments and/or cash lump sum on retirement of the payee. Because a pension attachment order is really a form of maintenance paid from the pension directly rather than by the paying party, it does not allow for a clean break financial settlement. 

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; however, these usually require cooperation between the parties.

Talk to us

To discuss this with the team please call us on 0345 872 6666 or fill in the contact form. Alternatively, you can read more about financial settlements here.

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