Pension sharing was invented as a legal concept over 20 years ago but there are still tricky problems that arise for spouses when they try to sort out their pensions on divorce, when there is an age gap.
What is a Pension Sharing Order?
In essence a Pension Sharing Order is a way of immediately separating a pension fund so that it becomes a separate fund for each spouse. It should provide considerable security for each spouse. They know where they stand in that each keeps their share of the pension that is divided, regardless of any changes of circumstances such as the death of their former spouse or their own remarriage.
It is therefore a very attractive solution for many people and provides a more secure and tax efficient way of sharing future pension income rather than maintenance which is fraught with risk of termination or variation for many reasons.
Pension sharing when there is an age gap
It is however very important to consider that in certain cases, pension sharing can have unintended consequences and one of these can arise where there is a large age gap between the couple.
It is perhaps easiest to take an example of a male police officer, married for 20 years who took retirement at 55 and then divorced his wife who was 45 at the time. This age gap of 10 years presents problems.
Assuming that the wife has no other pension, if a pension sharing order is made in the divorce to equalise the pension incomes then the husband immediately loses a substantial chunk of his income, as part of his fund is effectively transferred to the wife immediately, but here comes the snag…
Under the terms of the police pension scheme, the wife cannot access her part of the scheme until she is 60. This means she has 15 years to go before she could benefit and yet her husband has immediately lost a large amount of his income.
Whilst this is a relatively extreme example (and often age gaps are smaller) it demonstrates that it is important to consider the age gap problem before embarking on divorce or a pension sharing order.
Alternatives and solutions
This age gap situation is always one in which expert legal and financial help should be taken – there are possible alternatives and solutions but none of these are entirely straightforward.
We work closely with actuaries and financial advisers to help our clients assess all the options and make the right choices for them. Often even though the immediate loss of income seems unattractive it can still present a secure solution which means that the couple can achieve an immediate clean break and move on in their lives.
In the example given above, if the wife has an income and is content to rely on this until retirement age, the age gap may not be such a problem. If on the other hand she has no income due to illness or dependent children then it may be necessary to consider other possible alternatives such as adjourning the pension sharing order until she can take the benefit of it and relying on maintenance in the meantime.
This is fraught with complexity as there is a risk that if the husband dies in the meantime and she may be left without income or pension so extensive life cover would be needed (although that would not protect against all risks, for example if the husband remarried and got divorced, giving rise to the second spouse having a claim on the pension before it has been shared with the first wife). There is also the possibility of deferring the divorce all together and relying on maintenance payments and the security of the widow’s pension should the husband die beforehand.
Very few couples would wish to consider this if their marriage has irretrievably broken down as it leaves both parties in limbo with risks on both sides. Most clients want to achieve a permanent solution if possible and that is why pension sharing is usually so attractive.
If faced with the age gap problem outlined above some couples will consider a solution usually known as “offsetting”.
In simple terms this is a situation in which non pension capital assets such as the home, investment property or other assets such as savings and shares are “traded” against the value of the pension. In this way the entire pension fund is preserved and not affected by an immediate reduction in income whilst the wife receives the other assets which can be used immediately to provide her with an income.
This all sounds easy but it is far from that. There are considerable complexities in weighing up the true value of the pension compared to the value of the other assets being off-set. Often schemes such as the police or military schemes have considerable “hidden value” and the values given by the scheme do not reflect the true value of the cost of buying the equivalent benefits in the open market.
It is therefore important to take the best possible legal and financial advice before agreeing any offsetting arrangement.
When to seek help
In summary, the resolution of pensions in divorce where there is an age gap between the spouses is complicated and the key is early and comprehensive advice to make the best possible use of pensions which represent long term financial security – cutting corners on this will inevitably lead to the wrong solution for many people.
If you would like to discuss pension sharing when there is an age gap please get in touch with our Family team.