The end of a marriage or civil partnership is likely to be an emotional and stressful time for everyone involved. Part of the divorce process usually focuses on the practicalities, such as carving up the matrimonial assets into two separate households, making arrangements for any children and trying to maintain a similar lifestyle to that enjoyed before the separation. These steps can be a stressful and draining experience, whether they are amicable or require court intervention. Whilst the ‘here and now’ is typically the primary concern, one often overlooked area is the distant future – namely retirement.
Although legal teams work to achieve the best outcome for clients there can be a lack of confidence amongst lawyers when splitting any pension assets. Pensions tend to be a complicated element of financial planning, involving technical terminology and complex benefits. This can result in one party (most usually the wife) missing out on large sums of pension value, especially given that pension benefits can be one of the most valuable assets in the divorce process.
If you have been the lower earner, taken career breaks (to raise a family or provide care to aging parents) or worked part-time you may face retiring on a fraction your ex-spouse or partner’s retirement income, albeit because of certain circumstances or the decisions you have taken as a couple in the past.
In England, Wales and Northern Ireland pensions are not valued as any other investment, so it is important that your solicitor engages an actuary to determine the value of the pension rights in today’s terms during the divorce process. There is a duty for both parties in the divorce to fully disclose their assets, including pensions.
WHAT IS A PENSION SHARING ORDER?
The most up-to-date option for splitting pension benefits after divorce is by using a ‘pension sharing order’. This piece of legislation was introduced in 2000 to provide a ‘clean break’ option by which to share pension benefits in the divorce process. In summary, it allows each party to take a share of the pension which they then control themselves from that point onwards. As a result, it provides for each individual to hold independent pension benefits. Of course, this also means that death benefits are removed, along with the possibility that the higher earner might not be able to replace the fund they have ‘lost’.
HOW DOES PENSION SHARING WORK?
Pension sharing works by valuing all pensions from a range of sources:
- Workplace pensions (both money purchase and final salary schemes) and rights in the Pension Protection Fund
- Private pensions
- Annuities
- Self-Invested pensions
- Earnings-related element of the old state pension or protected payment under the new state pension
The calculation of any pension provision is usually carried out by an actuary to enable the courts to determine a fair and reasonable split of the total pension ‘pot’. You can then choose to become a member of the existing pension scheme in your own right or transfer your portion to a new pension provider.
ALTERNATIVE PENSION SHARING OPTIONS
There are a couple of alternative pension sharing options which may be used as part of a divorce process.
PENSION ATTACHMENT
Introduced in 1995, a pension attachment redirects some or all the member’s pension benefits to the ex-spouse/civil partner when it comes into payment. Some of the pension income payments, lump sum or death benefits are paid to the other party, although not at the time of the divorce. This doesn’t offer a ‘clean break’ but does allow any benefits to revert to the pension holder if their former partner dies or remarries ahead of the payment date.
PENSION OFFSETTING
Pension offsetting does offer a ‘clean break’ for both parties, by allowing each individual to keep their own pension benefits with other assets being ‘traded off’ against the cash value to balance the divorce settlement. It tends to be agreed outside court, so can be a more cost-effective option, although it still has to be approved as part of the divorce process. Pension offsetting is useful if there are overseas pension assets which cannot be shared via a UK court order. However, it can be difficult or impractical to implement, especially if assets such as a car or home have to be ‘traded’.
WHAT DO YOU NEED TO KNOW ABOUT PENSION SHARING
It is important to be realistic about all the financial elements which have been built during a marriage or partnership. For example, taking time away from a career to raise a family will likely have allowed your spouse or partner the opportunity to continue working and perhaps save into their pension. It is therefore only reasonable that the pension pot is suitably allocated to each party. Understanding the financial position of your relationship, and apportioning it appropriately, should be a sensible part of any divorce process.
SECURING A FAIR FINANCIAL SETTLEMENT
Any divorce process will be a stressful and emotional time, but it is also important to think of your long-term situation as well as your immediate financial concerns and needs. Do consider whether you are being offered a fair settlement when it comes to dividing up any pension benefits and seek financial advice as part of the divorce process, and over the longer term, to properly manage any pension assets you might have.
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