Pensions on Divorce.

Pension sharing involves one partner’s pension fund being shared between the divorcing partners. This is a common approach in circumstances where one party has a significantly larger pension pot than the other.

For example, in a relationship where one party has taken on the bulk of child-rearing responsibilities, and consequently had periods of time when they made no contributions to a pension, it would usually be considered reasonable that they be entitled to a significant share of their partner’s pension pot. This would be the case regardless of whether any formal commitments to that effect had been made.

Pension sharing essentially creates two pension pots from one existing fund, ensuring that each party has a pension they can draw on in retirement. This pot can be moved to a separate pension scheme (an External Transfer) or transferred to a separate pot within the existing pension scheme (an Internal Transfer). Either way, each party has a separate pension pot in their own name.

As such, pension sharing involves a clean break in financial arrangements, which is often a key consideration when deciding which approach is best for your situation. Once the financial settlement is finalised, you can act independently in respect of your pension pot.

Pension offsetting is where other matrimonial assets are used to balance out the value of one party’s pension fund. Assets such as the family home or family savings can be offset against the value of the pension pot so that each party receives a reasonable overall proportion of the matrimonial assets.

This process allows one partner to retain the whole of their pension pot. Pension offsetting is often used if one party intends to remain living in the family home, meaning that the value of the property is difficult to divide.

For pension offsetting to work, all the assets involved need to be carefully and accurately valued to ensure that each partner receives the correct amount in the settlement. If you are thinking of offsetting your partner’s pension, it is important to consider what your retirement arrangements are and whether this arrangement will leave you suitably provided for. We will support you in securing all the information necessary to achieve the right approach for your circumstances. Beware; pension values, being illiquid (ie not available to encash immediately) are not like for like interchangeable with the value of liquid assets, such as the net proceeds of the family home or savings.

Any pension offsetting arrangement is finalised on divorce, so this also means a financial clean break between you and your former partner. Once the settlement is agreed, you are free to use the assets you receive in the offsetting as you wish.

A pension attachment order is a less common option involving a percentage of one partner’s pension being paid to the other on retirement. This approach, previously known as earmarking, has several problems:

• The non-pension holding party has no control over the pension funds – money is only paid once the pension holder retires.
• If the pension holder dies before retirement age, the former partner may receive nothing.
• Claims under a pension attachment order stop if you remarry.

Coupled with the fact that a pension attachment order does not create a clean break between former partners, these issues mean that pension attachment orders are rare.

In circumstances where one partner is older than the other and will therefore reach retirement age before the other (or has reached retirement age and is already receiving their pension), while the other partner will not be entitled to a pension for several years, deferred arrangements are possible. The deferred arrangement could be a pension sharing agreement or a commitment to pay a cash lump sum to the former partner upon their retirement.

The first step is to accurately value all existing pension plans or schemes held by you and your partner. By following these simple steps, we can support you in making the right choices for your future:

1. List all the pensions you and your former partner hold – depending on your, and your former partner’s, employment history, this can take some time. We can support you in completing this important step.
2. Accurately value all the pensions – this can be a complicated process, and expert advice is usually necessary. Although most administrators provide pension holders with an annual update on the performance of the pension, which will usually include a cash equivalent transfer value (CETV) or cash equivalent benefit (CEB), this may not accurately reflect the true value of the fund. We will advise you if a pension expert or actuarial report is required.
3. Consider your expectations on retirement – many people find it difficult to plan carefully for retirement. Together, or with the aid of an independent financial planner, we will create a realistic plan for your future based on the current value of existing pension funds and your ongoing ability to contribute to a pension.
4. Come to an agreement with your former partner – we believe that negotiation and collaboration are the best starting points when it comes to financial claims. We have vast experience advising people on their most effective negotiating position and in conducting negotiations on their behalf.
5. Get a financial court order to formally recognise the settlement – a pension administrator cannot put in place any pension sharing arrangement without a court order and the decree absolute of divorce.

People often fail to make the most of their financial claims on divorces because they underestimate the contribution that pensions make to most cases. Even if your marriage was relatively short or the pension was already running before you got married, a pension can still be a relevant asset.

Sometimes people can be put off considering pension arrangements because they seem very complicated, particularly bespoke schemes put together as part of a family business. This is where expert advice is invaluable. We can support you in ascertaining a value of the assets and ensuring that you receive a fair proportion of their value.

A basic State Pension cannot be shared on divorce.

The Additional State Pension can be payable to men born before 6 April 1951 and women born before 6 April 1953. Additional State Pension entitlements can be shared in a financial settlement. These payments can continue until the person remarries or enters another civil partnership.

It is not usually possible to protect a pension in a financial claim. The law requires all assets to be disclosed, and most pension funds are considered relevant assets. There are circumstances where a court may decide that a pension should not be included, but this is rare.

It is possible to use the pension offsetting mechanism to retain full ownership of a pension if you can agree to use other assets to offset the value of the pension. Any assets used to offset the value of the pension need to reasonably reflect its value. This is a complex issue due to the difference between the value of the liquid as opposed to illiquid assets as explained above.

It is possible for a court to adjust a financial settlement in the future if all relevant information about the value of assets is not disclosed.