Pensions on Divorce

PUBLISHED 17.01.22

 

A pension is just like any other asset and can be divided between spouses in a financial settlement following a divorce. There are several ways in which a pension could be dealt with on a divorce:

  • A Pension Sharing Order is an order which divides a pension into two; a portion of the member’s pension will be transferred into a pension of the other non-member party. Effectively, there becomes two pensions. For example, if the pension was worth £100,000 and a 50% pension sharing order was made, both the member and the former spouse would have a pension worth £50,000 each.
  • A Pension Attachment Order is an order which means the pension scheme must pay a proportion of the pension to the member’s former spouse. The problem with an attachment order is that when the pension member dies, the payment to the former spouse also stops. If they die before they receive their pension, the former spouse will not receive any income from the pension.
  • Offsetting can also be considered. This is where one spouse’s pension provision is left with that spouse and the other spouse takes other assets such as capital to compensate for the loss of the pension. However, this is very difficult to calculate because a pension is a future income stream and that is being traded for capital (usually) which leads to the question of how to fairly quantify the offsetting sum.

In every case, thought must be given to the pension assets available. They are often the most valuable asset of the marriage, although not considered as such as most spouses begin with considering any property and the equity within the same.

In many instances, a report from a specialist pension expert called an “actuary” is required or recommended. Solicitors are not pension advisors and cannot advise clients as to how a pension scheme should be shared, nor provide advice concerning whether it is in their financial interests to offer or retain a particular pension. Pensions are complex assets and, as such, require specialist advice.

An expert report will provide calculations setting out how a pension could be shared and what income each party would receive. The report can also provide a value for offsetting and how much capital would be need to be applied to replace a share in a pension.

The expert will consider what a pension share would produce if there was equality of value and if there was equality of income in retirement. Using the example of a pension worth £100,000 and a 50% pension sharing order being made; whilst this would produce equality of value, it is unlikely to produce equality of income and this is where a specialist’s input can assist both the couple and their advisers to make the best possible decisions and offer the most accurate advice.

It is also sometimes relevant to consider the impact of pension freedoms which can change how a settlement might be dealt with. For example, a pension sharing order might be made to enable one party to have access to capital now, if they are over 55, and they can then draw their 25% tax free lump sum from the pension accordingly.

Pensions are a very complex area but it can be said that no financial settlement should be entered into without careful consideration of pensions and how they are to be approached.

Ultimately, the financial settlement has to be fair for both parties and this applies to retirement income and pension capital accrued during the marriage/relationship. Often, an actuary can helpfully assist with quantifying any pre and post accrual of pension benefits which can be important features when negotiating a fair pension settlement.

If you would like to speak to a member of the Family Team regarding financial settlement during separation, call Dunn & Baker Solicitors:

Exeter 01392 285000    Cullompton 01884 33818