Pensions on Divorce

When dealing with the division of matrimonial assets, pensions are often the most difficult class of asset to deal with.

Somewhat bizarrely until the middle of the 1990’s the Courts paid little attention to pensions when making financial orders upon Divorce.  This approach typically favoured the husbands but, thankfully, the Courts have now caught up with the times and this is now no longer the case.

When dealing with a pension, the common approach taken to establish a value for this asset is to obtain the Cash Equivalent Transfer Value (“CETV”) for the pension. If the CETV is being requested in connection with a Divorce or a Dissolution of a Civil Partnership, the Pension Companies are obligated to provide you with this information free of charge.

However, the CETV will not necessarily establish the correct value for the pension as there are a number of factors (for example the person with the pension being able to retire earlier than the traditional age of 65), which can mean the pension is in fact more valuable than its face value initially shows.

Furthermore, although the CETV is used to identify a given value of a pension at the time the marital finances are being divided, it is important to note that pensions are, in essence, a future income source and it will therefore not be possible to release the full amount stated in the CETV as a capital sum.

Due to the complex nature of pensions, coupled with the fact solicitors are unable to offer advice to clients on financial investment matters, whenever a case involves pensions of a sizeable amount, it is always advisable for to ensure an Independent Financial Advisor is always consulted with a view to a report being prepared to establish: –

  • The correct value of the pension.
  • If appropriate, the correct division of the pension fund between the parties to achieve a desired effect (normally equality of income for the parties at their respective retirement age).
  • If a transfer is to take place into another pension fund, what type of fund should be used to ensure the maximum return possible.

Also, when considering how pension assets should be divided following the breakdown of a relationship, it is also important not to overlook the State Pension.  A CETV for each party’s state pension can be easily obtained and it is possible to transfer certain benefits accrued under the pensions (such as National Insurance contributions) between spouses.

There are three ways of dealing with pensions after the breakdown of a relationship and these are as follows: –

Pension Earmarking / Pension Attachment Orders
This option was the normal approach taken by the Courts up until the beginning of 2001.  Pension Earmarking was introduced by the 1995 Pensions Act, for divorce petitions filed on or after 1st July 1996.

In summary, an order made under this provision will ensure that, on retirement or death of the person with the pension fund,  the payments under this pension will be split between that person and their ex-spouse.

Although this approach can achieve an equality of income for the parties, it has now largely fallen out of favour by the Courts and family practitioners due to the fact that it does not achieve a clean break between the parties.

Furthermore, if the pension is in payment and the person with the pension fund then dies, or the ex-spouse remarries, then the payments under the pension to the ex-spouse will stop.

Therefore, whilst an Earmarking Order is still an option, due to the potential problems that could arise, specific advice needs to be obtained and the situation fully explored before an order of this type is sought.

Pension Sharing Orders
As from 1stDecember 2001, the Welfare Reform & Pensions Act 1999 has provided the Court with the power to split pension rights between married couples when they either Divorce. This power also applies if the parties are seeking to Dissolve their Civil Partnership.

The purpose of this type of order is to ensure a clean break is achieved between the parties. This is done by a proportion of the pension fund in question being transferred to the ex-spouse so as to enable them to set up a pension fund in their own right.

This option therefore has the advantage of each party having their own individual pension fund that will not be effected by the death or the remarriage of the other.

Due to this type of order being able to equalise the parties income positions at their respective retirement ages and also achieve a clean break between them, this is now the order that is almost always made by the Court when deciding how pensions should be divided.

Under this option, all of the marital assets are calculated along with the parties respective pension entitlement. If it is the case that the person with the benefit of the pension, for whatever reason, wishes to retain this in its entirety, discussions can take place regarding the pension forming part of that person’s overall share of the marital assets with the ex-spouse being compensated in some other way (for example being provided with additional capital or some other asset).

This option only tends to be adopted where a negotiated settlement is reached between the parties as, if an agreement cannot be reached and the Court is asked to make a decision on this issue, it is more than likely a Pension Sharing Order will be made to deal with matters.

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