“Pensions on divorce” is about when marriages and civil partnerships break down, meaning that related financial and property matters must be dealt with. The financial remedy process ensures that the assets are distributed following divorce or dissolution.
Usually the biggest asset of the marriage or civil partnership is the former family home. Quite often pensions come in at a close second. The Courts have extensive powers to deal with pensions by way of pension attachment orders or pension sharing orders.
Pension attachment orders
These are quite rare in practice due to their nature of not providing the parties with a “clean break.” A clean break results in financial independence from one another following divorce or dissolution. A clean break is common when the parties have no children and/or are of a younger age.
The original pension member maintains control over the payments made into the fund enabling them to stop or reduce the payments at any time following divorce or dissolution. If these types of orders are used it will often be when the value of the pension at the time of financial proceedings is low but is expected to increase significantly by the date of retirement.
Pension sharing orders
These orders are a better solution to deal with a pension asset. This type of order provides for the non-member spouse or civil partner to receive a percentage of the member’s pension at the time of the financial proceedings. Depending on the pension provider, a pension sharing order will result in the non-member having a pension pot of their own via an internal or external transfer which they can continue to contribute to if they so wish.
There is no obligation placed on the Court to make a pension sharing order rather, they will consider all the circumstances of the case.
The starting point for ordering a pension share is to obtain a cash equivalent transfer value (CETV) of the pension or pensions of the parties. A CETV is essentially an estimation of the value of the pension. It is important to bear in mind that it will likely change at the time it is implemented, due to market fluctuations if nothing else. Depending on the type of scheme, for example, public sector schemes, the CETV may well not be a true reflection of its value either and for that reason it may be prudent to seek the assistance of a pensions expert.
When a pension share is ordered the transferee does not receive cash in their hand, what they actually receive is some level of security in their later years and compensation for loss of benefit they may have received if the marriage or civil partnership had not come to an end.
The assets of a marriage or civil partnership are made up of liquid and illiquid assets. Pensions on divorce are considered to be illiquid assets. For this reason, it is not uncommon for pension offsetting to occur in lieu of pension sharing.
Often the party with the pension will be keen to preserve their pot and in exchange for a share of the pension will offer their spouse or civil partner other capital assets e.g. the family home or a lump sum payment from savings or investments.
If offsetting is an option on the table, careful consideration should be given to its suitability because, as mentioned earlier, it is difficult to predict what the final value of the pension may be, sometimes many years in the future due to market fluctuations or other reasons. For example, final salary pensions may suffer a shortfall and be unable to produce the anticipated benefits. It is therefore essential to try as far as possible to ascertain the viability of the pension provision before considering offsetting and to ensure that the pension is valued realistically.
Lawyers are very rarely pension experts and should not attempt to be. More often than not expert advice is required particularly when the pension funds are of medium to high value or the parties are closer to retirement age. A good lawyer dealing with financial matters on your divorce will guide you in determining when the advice of a pensions expert should be sought.
If you have any questions in relation to the topics discussed, please contact us and ask to speak to a member of the Family Team.
