Pensions and divorcepensions and divorce

Often one of the largest of the matrimonial assets and yet commonly the most difficult to value and agree upon within a divorce settlement.

There are essentially three options for ex-spouses to consider – none are mandatory – each case is assessed individually and it is up to the parties and their lawyers, and if necessary the court to decide on the best method. A combination of methods can be used but the same pension rights cannot be both shared and earmarked.

Pension Offsetting

The value of the spouse’s pension is traded against other assets from the marriage.

Disadvantages:-

  • Difficult where the pension is the largest asset and there are not enough other matrimonial assets to trade against it
  • Complicated
  • Could be unfair for a spouse with a pension fund of, say, £100K (that cannot be accessed immediately) to be asked to give up £100k of other assets such as cash/property. The circumstances of both parties need to be looked at

Advantages:-

  • Flexible
  • Provides a clean break

Earmarking

Introduced by the 1995 Pension Act. Allows for part of the pension, including tax-free lump sum payments, to be paid to ex-spouse when pension is eventually drawn.

Disadvantages:-

  • No clean break
  • Ex-spouse only receives benefits when the pension holder takes benefits
  • Earmarking order is capable of being varied, leaving the pension holder vulnerable to further claims by the ex-spouse
  • Ex-spouse has no control over where funds are invested
  • Ex-spouse can lose all benefits if he/she remarries, or if the pension holder dies before retirement

Earmarking is not satisfactory but the courts can still make an earmarking order if they think it appropriate or if the parties agree.

pension sharing

Pension Sharing

Also known as pension splitting. Introduced by 1999 Welfare & Reform Act, and gave courts the power to split pension rights between spouses on divorce.

The pension is given a “current day” cash value, in other words, how much is needed now to fund for that pension at the anticipated retirement date. Both parties agree the percentage split of that value, or the split will be ordered by the court on the basis of the circumstances of each spouse. The value is transferred, by way of a court order, to the ex-spouse as a separate independent pension while the pension holder has a reduced pension value.

The ex-spouse’s separate pension can stay with the scheme if the trustees are willing to allow this – this is called ‘internal sharing’. In reality, most trustees insist on the value being transferred out to the ex-spouse’s own pension – this is called ‘external sharing’.

Advantages:-

  • It is a clean break
  • The ex-spouse has a pension scheme that he/she can control in terms of investment choice and when to take benefits
  • The pension holder is able to keep more of the other matrimonial assets

Disadvantages:-

  • Pension sharing is only available to married couples or civil partners, not to co-habiting couples