Deciding how to deal with pensions on divorce – both your own and your spouse’s – can be very intimidating. In this article we look at how pension sharing orders are calculated and what you should consider.
Pension assets on divorce
When dealing with a financial settlement, there are three main types of claim that a spouse needs to consider. These are:
- Non-pension capital claims (such as savings and property);
- Income claims (salary and maintenance); and
- Pension claims.
Pension provision and capital assets are a separate category of asset – £1 in your pension pot does not necessarily equal £1 in cash terms.
Pension provision is often overlooked as a future asset that may not be readily available/tangible now. People tend to focus on the immediate need and the “here and now”, such as housing, and therefore disregard the longer term need in retirement. Equally, people with pension provision accrued outside of the relationship do not always take steps that may be available to protect this interest in the event of a relationship breakdown.
How are pensions dealt with on divorce?
The principle of a starting point of an equal division applies to pension provision and this can be achieved using their capital values (in limited circumstances) or by analysing the retirement benefits they will generate (a much more accurate approach).
We first need to gather all of the relevant information around the pension provision – dates of service and an up to cade Cash Equivalent Value (better known as a CEV) for each and every scheme. The CEV is a specific value for the pension pot and is not the same as an annual statement/projected forecast so an early request for the CEV from your pension provider will be helpful.
Once we have all of the relevant information for the pension scheme(s) we can then advise on whether pension expert advice is required. A pension expert is generally an actuary who is qualified to explain the effects of pension sharing options – it is a common misconception that a 50% pension share will provide for equal income in retirement.
The main ways the court can share pension provision are:
- Pension Sharing Order – which involves a percentage of the pension being transferred to the other spouse which creates an entirely separate fund in their name. It is shared at the point of divorce rather than in the future.
- Offsetting – leave a pension alone but give the other spouse more capital now instead.
As explained above, pensions are a completely different category of asset to other capital assets like property or savings. The court therefore prefers to deal with pensions separately to capital assets and prefers pension sharing with the advice of a pension’s expert.
When might I need a ‘Pensions on Divorce Expert’?
It may not be always proportionate to instruct a pension expert, for example in matters where the parties are younger and have pension assets which have a total CEV value of less than £100,000 but each case will turn on its own facts and every case is unique therefore requiring bespoke advice on whether a pension expert is required.
Parties should also be mindful of public sector pensions, uniformed service pensions or other defined benefit schemes where the pensions are more valuable and carry additional benefits that might not be immediately obvious from the pension CEV alone.
Pensions can be a complex area and it is important to seek advice from a specialist Family solicitor and, potentially a pension expert, to guide you through the process, to ensure that both your present and future needs are considered in any financial settlement. Additionally, if you have pension provision you have accrued outside of the relationship, an early chat about options available to protect this is worthwhile.
If you would like advice on how to deal with pensions on divorce, please get in touch.