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What happens to pensions on divorce?
There was a time in the dim and distant past when pensions on divorce were given little status when considering how the marital pot should be divided between the parties. So much has changed over the last 20 plus years, however, and a pension is now often the second most valuable asset after the family home. As a result, how they are dealt with in this situation has become a much more important issue.
As with many things, change and progress has brought more complexity into the pension world on divorce, and a pension pot can take on many guises and forms. Examples include defined benefit schemes, SIPPS (Self invested Personal Pension Schemes), defined contribution schemes, public sector schemes, e.g. the NHS pension scheme. It is therefore essential that the type of pension is ascertained and understood fully.
Usually, the first step of the process is to get a cash transfer value of the pension, i.e. the current value of the pension. However, particularly with defined benefit schemes and public sector schemes, it can be very dangerous to solely rely on the cash transfer value, as this may not reflect the true “value” of the pension. For example, there may be hidden benefits within the Scheme which are not reflected in the cash value. In essence, the cash value may only be providing a snapshot, rather than the full picture. This is why it’s essential to get expert advice from a pensions expert. In most cases where the pension pot is valued at £100,000 or more, you should obtain a report (usually from an actuary or other pensions expert) when considering how to deal with pensions on divorce.
Having addressed the complexities outlined above, parties can often then be left grappling with exactly how to deal with pensions on divorce. These are the options available:
The first available option is “pension sharing”. This is where the pension pot is divided between the parties in such shares as the parties may have agreed, or as ordered by the Court if not agreed. Pension sharing means that a percentage of one party’s pension is transferred to the other. The pension credit must be transferred to another pension. A pension share can take place even if the pension is in payment.
A second option is to “offset”. This means that they agree to take more of the available capital, instead of taking a slice of the other party’s pension. It may be better for each if one party retains their pension intact and the other receives more capital.
Pension attachment order
Since the introduction of pension sharing, it has become very unusual to have a “pension attachment order”. In the bad old days, however, this was often the only option open to the parties. Taking this course of action means there is no pension share but instead the pension attachment order is “attached” to either the pension income or the lump sum that the party with the pension will draw down when they retire.
There are number of drawbacks with this kind of arrangement. The party with the attachment must hope the paying party does not die before they draw down on their pension because if they do, the pension attachment is lost. The paying party may defer retirement, thereby depriving the other party of accessing their share.
Any form of pension division, whether it is offsetting or pension sharing, must be considered and negotiated upon the premise of fairness. What is fair to both parties underpins the financial principles that apply when considering how to divide the matrimonial pot. Of course, the concept of fairness could be considered a subjective exercise in the eyes of the parties caught up in the thick of it. What one party may consider as fair the other may view as grossly unfair. At the end of the day most cases are about needs – what does each party need in order to move on from the divorce? Those needs are simply put, in most cases, as a need for capital generally to re-house, a need for income so they can meet their reasonable needs, and a need in their retirement.
In summary, it is vital that parties receive proper legal and financial advice on how to deal with a pension pot on divorce. Getting it wrong could have a significant impact on the kind of retirement each end up with.