After the matrimonial home, a pension is often the second largest asset to be considered in the event of a divorce. It is therefore important to understand the options available to parties when dealing with pensions following divorce.
Pensions are unique and unlike any other asset that may be divided on divorce. Whilst on the face of it, it may appear that dividing a pension 50:50 is a fair approach, this is not necessarily the case. There are several factors that need to be considered, such as: the ages of the parties, life expectancy, parties’ needs (capital and / or income) and length of marriage.
The starting point will be to obtain a cash equivalent value (CEV) to determine the cash value of the pension accrued to date in the pension scheme. It is important to remember that any CEV is gross of tax.
To obtain the CEV of your pension, you can contact your pension administrator directly and they will be able to provide you with a valuation.
You can also obtain your state pension forecast on Gov.uk, and the CEV of your state pension can be requested on Form BR20.
However, please be aware that the CEV of a pension might not reflect the real value as it does not consider discretionary benefits or future benefits. This is particularly relevant in public sector pensions or uniformed service pensions (e.g. police or military).
In most cases it is strongly recommended that parties instruct a pension expert to provide a report on the current real value of the pension and the anticipated value at the date of retirement. This is particularly important if the pension’s CEV is more than £100,000; the pension is a defined benefit or a defined contribution pension or if one of the pensions is a uniformed pension.
Obtaining a valuation and detailed analysis on the possible options for pension distribution is very important if you are the financially weaker party which statistically, is more often the wife.
Once the above has been obtained there are different options in distributing a pension including offsetting, pension sharing and pension attachment.
Offsetting a pension is when the value of the pension is set against the value of other assets held between the parties. The pension therefore remains with the pension member, however the other party may receive more capital (e.g. one party retains the matrimonial home in exchange rather than a percentage of the pension). A pension expert can advise on the appropriate amount to offset against other assets.
However, caution is advised due to the way pensions are valued and taxed. Additionally, a pension later in life is a regular income whereas a property is not a liquid asset and provides no regular income. When offsetting a pension there is a risk that if the pension is not accurately valued, the trade-off between a pension and the family home may not be fairly balanced as a pension can exceed the value of a property.
As the name suggests, pension sharing is when a pension is divided between the parties. The pension member will transfer a percentage (up to 100%) of the pension to their spouse. Pension sharing orders are the most common method of dividing a pension on a divorce. This is because it provides the pension recipient with their own pension and enables them to decide what they wish to do with their pension pot in the future.
Pension sharing orders are the most common order made by the court. A new report from the Manchester Institute for Collaborative Research has found that pension sharing on divorce benefits women’s finances later in life as, typically, men have substantially larger private pensions than women. The research also shows that the disparity between men and women’s pension wealth increases significantly over the working lifetime.
A pension attachment order provides for a spouse to receive a percentage of the pension once the pension member starts receiving their pension (i.e. the ex-spouse attaches as a beneficiary to the pension arrangement). This can apply whether the pension is received as income, a tax-free lump sum and/or as death benefits.
If you require further information, the Advicenow guide on pensions on divorce is a good starting point. However, if you are in the process of separating and require legal advice, please contact a member of our team.