Pensions are often considered in the settlement of financial matters on divorce. As they are regarded as an asset, alongside bank savings, investments and property ownership, they may be included as part of the division of these assets between the divorcing spouses.
David Connor, director and family law specialist at WHN Solicitors, outlines the main ways that pensions can be dealt with as part of a financial settlement during divorce proceedings.
1. Pension Sharing – A pension sharing order is when one party’s pension fund(s) is reduced by an agreed percentage which is then transferred into a pension fund for the other party. This option can enable a clean break between the divorcing couple. Depending on the type of pension, the other party may get a pension with the same provider, or if it is transferred for example from a private pension, it may have to go to a different provider. Receiving financial advice is a must in these circumstances.
2. Offsetting – The pension fund is kept intact but is offset by agreeing a greater share of other assets, such as the family home, or as a capital sum of money that is paid in lieu of the percentage of the other party’s pension. Again, this option can have the advantage of enabling a clean break but is dependent on the availability of other assets and capital to use to offset the pension fund value.
3. Pension Attachment Order – At retirement, one party pays a percentage of their pension income to the other party. The order ends on the death of the payor or the remarriage of the payee. A Pension Attachment Order is not very tax efficient and doesn’t achieve the clean break many people desire in a divorce settlement. In most cases it is not appropriate, and these days is rarely used.
4. No action is taken – Each party retains their own pension funds.
Determining the value of a pension ‘pot’
As pensions are considered alongside all the other assets in a divorce settlement, both parties (or the judge if the matter is contested) seek to agree an order that is fair and as far as possible, meets both parties’ needs.
As with all matrimonial cases this can be a difficult balancing act. There can be many disparities in determining the value of the total pension ‘pot’, and what income each party will receive from the various funds within it.
There are many different types of pensions that all have different benefits attached to them, therefore pension scheme actuaries may value funds in a different way to produce a figure for the transfer value of the fund. For example, the pension ‘pot’ may involve a private salary scheme, a money purchase personal scheme, a public final salary scheme and pensions with guaranteed annuity rates, which are all very different in nature.
Despite being different, these schemes’ transfer values may, on paper, appear to be the same, which will not reflect the true value of the benefits attached to the schemes.
Seeking professional advice
It is vital that for any financial settlement that involves pensions, the parties fully understand the nature of the pension schemes and the benefits that go with them and, what may happen should a pension sharing order be agreed.
In many cases a division of pensions by reference to the transfer value alone will not represent a fair solution. It is highly advisable to seek an actuary to assist with determining the nature and true benefits of these schemes to agree a fair settlement.
Other considerations include dealing with the premarital part of a pension, or where one party is already in receipt of a pension at the time of divorce and the other is still someway off retirement. This may once again, prove to be a difficult and complex issue that requires specialist advice.
Additionally, if one partner has built up a significant pension fund while the other has, for example, stayed at home to look after children, and not made any pension contributions, professional advice will be required to determine the best method of making sure this important asset is split fairly between both parties.
David Connor is a director based at WHN’s Rawtenstall office. He leads a team of specialist family lawyers, helping individuals on all areas of family law including complex financial cases including pre-nuptial agreements, financial settlements in divorce and separation.
If you need help on a divorce and finances matter, our friendly specialist solicitors are always here to help. Please contact David on 01706 225621 or by email david.connor@whnsolicitors.co.uk
