Divorce, Separation, Family Law
Pension sharing and divorce
If you are contemplating divorce, then a particular area of concern is likely to be your pension. Perhaps you have a pension that you wish to protect or maybe your spouse has a pension that you believe you are entitled to part of.
Agreeing the financial settlement between a divorcing couple is a sensitive and often difficult issue. Ideally this can be agreed amicably, but if this is not possible then you or your spouse can ask the court to make an order.
How can a pension fund be divided
- By a "sharing" or "splitting" order, when the pension fund gets divided into two separate smaller funds, or
- By an "earmarking" order, when part of a person’s pension fund is designated for the other spouse but the fund remains intact until they reach retirement and then both spouses’ pension lump sum and pension income continues to be sourced from the same fund.
In determining the financial settlement, all assets will be considered as available for division, including any pension plans. Depending on your circumstances, you might prefer to retain more of the realisable assets such as cash, shares or property. Alternatively, you may wish to retain your pension and give your spouse a greater percentage of the house. This process of negotiating over the different types of assets is called offsetting.
A pension fund may be divided in one of two ways:
A pension sharing order
A pension sharing order survives death and remarriage and can apply to all forms of pension fund apart from the basic state pension. However, you will need decree absolute before any pension order can be effective.
The pension share will always be phrased as a percentage of the fund and you always need a court order for a pension share.
Courts treat pensions differently from cash in the bank or your property, as they are less easy to realise, so the court will not match a pound in the pension fund with a pound in a property. What the court tends to do is treat capital and pensions separately so that it makes a property order and a pension order, if appropriate.
If the pension is not paying out yet, the court will need full disclosure including a recent transfer value. It will need to know the cash equivalent of the benefits of the pension if it is being paid out. It may be wise to instruct a pension actuary if there is anything complicated about the pension or your personal situation. For example, if you are younger than your spouse, you may need a greater division of the pension. A solicitor from our family team can advise you whether an actuary is needed.
If you are going to receive part of your spouse’s pension, known as the pension credit, you will need to be careful about how this is managed. The pension rules will tell you what is allowed, but some pension credits need to remain within the original pension scheme whilst others can be transferred externally. Care has to be taken with an external transfer as the nature of the schemes may be different. For example, you might receive a pension credit from a final salary scheme but transfer your credit to a money purchase scheme. You will need advice from an independent financial adviser if you are to receive a pension credit and we can recommend someone to help you with this.
If your divorce settlement takes a long time to agree, then the fund value may change within the period of time that the trustees have to implement the pension share and, again, specialist advice may be needed.