couple looking through paperwork. concept for reviewing pensions on divorce

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.

One of the questions we’re often asked is, how do you work out a financial settlement that’s fair for both of you, when you’re looking at an asset that may only be relevant in the distant future? The answer is not always straightforward.

Many cases require the input of a Pensions on Divorce Expert (PODE) who, along with the support of your solicitor, can help guide you towards a fair settlement for both parties.

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:

  1. Non-pension capital claims (such as savings and property);
  2. Income claims (salary and maintenance); and
  3. Pension claims.

In a divorce, pensions are treated as capital because they have an accrued value at the time of separation, but are dealt with differently to other forms of capital. This is because they can be difficult to quantify and not able to be accessed to access until later in life.

When might I need a ‘Pensions on Divorce Expert’?

Whilst trying to achieve a fair financial settlement during a divorce, you will need to consider the possibility of getting a pension sharing order.

A pension sharing order is a specific type of order which can only be made by the Court. It allows for a transfer of all, or a percentage of, one party’s pensions to the other party at the time that the settlement is finalised, rather than waiting until retirement.

It is important to draw a distinction between the concepts of “fairness” and “equality” in this context. This idea applies to both the overall financial settlement, but also to the specific issue of pension provision. Simply put, an outcome that is fair, is not necessarily one that provides both parties with equal pension assets.

The starting point for a financial settlement may be equality but there are other factors which need to be taken into account These could include the parties’ needs, contributions, health, length of their marriage, age or the fact that some pensions were built up before parties began living together or after they separated.

A Pensions on Divorce Expert can prepare a report for both you and your spouse, as a Single Joint Expert (SJE), where they will calculate the details of pension sharing order that is required in order to achieve fairness. It may not be always proportionate to instruct a PODE, for example in matters where the parties are younger and have pension assets which have a total value of less than £100,000.

However, this will not necessarily be true for all cases, and parties should be mindful of public sector pensions, uniformed service pensions or other defined benefit schemes. In these situations, pensions may be more valuable and carry additional benefits that might not be immediately obvious from the pension’s Cash Equivalent Transfer Value alone.

How are pension sharing orders calculated?

If you decide that you need the input of a PODE in your matter, then they will generally look at the potential income that each pension will produce in order to calculate a pension sharing order that will achieve fairness

In most cases, the guiding principle is looking to meet the parties’ needs in retirement, which is best achieved by dividing the parties’ pensions in a way that provides them with equality of income in retirement.

As an alternative, a pension sharing order can be calculated on the basis of the capital value of the pensions, rather than their potential to produce income. This can be required if the parties think a bespoke valuation of a pension is required to understand its true value. In any case, the approach needs to be consistent.

The capital value approach becomes more relevant when parties are considering “offsetting” rather than pension sharing. This is where instead of sharing a pension with a spouse, the right to receive a pension benefit in the future is effectively exchanged for a cash lump sum now. A PODE’s expertise will definitely be required in order to make the offsetting calculation.

For more information on pension offsetting please read our article here.

Summary

Pensions can be a complex area and it is important to seek advice from a specialist Family solicitor and PODE to guide you through the process, to ensure that both your present and future needs are considered in any financial settlement.

If you would like advice on how to deal with pensions on divorce, please get in touch.